Life Insurance in Trust: How It Works and Why It Matters

Writing life insurance in trust means the policy is held by trustees for the people you choose. When you die, the trustees can claim and pass the money on, usually without waiting for probate. In most cases the payout is also kept outside your estate, so it is not counted for inheritance tax.

It is one of the simplest and most valuable steps in arranging life cover, and one of the most often missed. Insurers provide the trust forms free of charge, and the trust is normally set up when the policy starts. This guide explains what a trust does, the main types, who should be your trustees and when a trust may not be needed.

What does putting life insurance in trust mean?

A trust is a legal arrangement. You, as the person who takes out the policy, are the settlor. You give the policy to the trust and name:

• trustees, who look after the policy and make the claim, and
• beneficiaries, the people the money is for.

When you die, the trustees claim from the insurer and pay the money to the beneficiaries according to the trust. Because the policy belongs to the trust rather than to you, it does not normally form part of your estate.

You can usually still be a trustee yourself while you are alive, and you keep paying the premiums. GOV.UK explains the roles of settlors, trustees and beneficiaries and how different trusts are taxed (GOV.UK).

What are the benefits of a trust?

1. Your family gets the money faster

Without a trust, the payout goes to your estate. Your family then has to wait for probate, the legal process that gives your executors authority to deal with your estate. That can take months. With a trust, the trustees can usually claim with a death certificate and the claim forms, without waiting for probate, as long as at least one trustee is still alive.

That speed matters. The mortgage, bills and funeral costs do not stop while probate goes through.

2. It can reduce inheritance tax

Money paid into your estate can push it over the inheritance tax threshold. The nil-rate band is £325,000 and the residence nil-rate band is £175,000, both frozen until 5 April 2030. The standard rate above the threshold is 40% (GOV.UK).

Add a £300,000 life insurance payout to the value of your home, savings and other assets, and your family could face a large bill. Written in trust, the payout normally sits outside your estate.

3. You decide who gets the money

A will can be challenged, and if you die without one, the law decides who inherits. A trust lets you name exactly who benefits. This is especially important if:

• you are not married to your partner, who would not automatically inherit without a will
• you have children from a previous relationship
• you want the money held for children until they are older.

4. It is kept private

A will becomes a public document once probate is granted. A trust does not.

What types of trust are there?

Insurers offer standard trust forms. The main types are below. Wording and names differ between insurers, so the exact form matters.

Type of trust	How it works	Often used for
Absolute (bare) trust	Beneficiaries are fixed when you set it up and cannot be changed	A simple gift to named people, such as your children
Discretionary trust	Trustees decide who benefits from a list of possible beneficiaries, and when	Flexibility as your family changes, single life policies
Flexible trust	Names default beneficiaries but lets trustees change them later	A balance between certainty and flexibility
Survivorship trust	For joint policies: pays the survivor if they outlive the other partner by a set period, otherwise into trust	Joint life first death policies
Split trust	Keeps critical illness or terminal illness benefits for you, while death benefits go into trust	Combined life and critical illness policies

Zurich, for example, describes an absolute trust as one where the beneficiaries “can never be changed”, and a discretionary survivorship trust for joint life first death policies, where the proceeds go to the surviving partner if they survive the other by 30 days or more (Zurich).

What about critical illness cover?

If your policy includes critical illness cover, you want that money paid to you, not into a trust. Most insurers offer trust forms that keep the illness benefit for you while putting the death benefit into trust. Using the wrong form can cause problems, so this is worth getting right at the start.

Who should be your trustees?

Choose people you trust to act sensibly and quickly. Most people pick:

• their partner, though think about what happens if you both die together
• one or two other adults, such as a sibling, parent or close friend.

Good practice:

• appoint at least two trustees besides yourself, so someone can act if one is unavailable
• tell them they are trustees and where the policy documents are
• avoid naming only young children, as they cannot act as trustees until they are adults
• review the trustees after major life events.

Do you always need a trust?

Not always. A trust may be less important if:

• the policy is joint and only there to clear a joint mortgage, and the survivor would use it straight away
• your estate is well below the inheritance tax thresholds and you are married, with a clear will
• the policy is assigned to a lender as security for a loan, which some commercial lending requires
• it is a business protection policy, such as key person insurance or shareholder protection, which needs a business trust or a different structure.

Even when a trust is not essential for tax, the speed of payout is still a good reason to consider one. Our advice is to look at it for every policy.

Can you put an existing policy in trust?

Usually, yes. Most insurers let you put an existing policy into trust using their forms. There are two points to check:

• Inheritance tax. Moving an existing policy into trust is usually treated as a gift of the policy’s value. For a term policy with no cash value, this is normally nil or very small.
• The type of policy. Some older or joint policies have restrictions.

Ask your insurer or adviser before you do it.

How do you set up the trust?

1. Choose the type of trust that fits your policy and family.
2. Complete the insurer’s trust form, naming trustees and beneficiaries.
3. Sign it with witnesses as the form requires, and have the trustees sign.
4. Send it to the insurer with the application or soon after.
5. Keep a copy with your will, and tell your trustees where it is.

There is usually no charge for the insurer’s standard trust forms.

Common trust mistakes

1. Not setting one up at all.
2. Using the wrong trust form for a joint or critical illness policy.
3. Naming only one trustee, or trustees who do not know about it.
4. Never updating the trust after separating, remarrying or having more children.
5. Losing the paperwork. Keep it with your will.

How Option Finance helps

We will:

• explain the trust options for your policy in plain English
• help you complete the insurer’s trust form when the policy starts
• make sure critical illness benefits stay with you where they should
• point you to a solicitor where your situation needs legal advice
• review the trust when your family changes.

How we are paid. There is no fee for our protection advice. We are paid by commission from the insurer you choose.

Frequently asked questions

Speak to Option Finance about writing your life insurance in trust

Whether you are taking out new cover or have a policy already, we can help you choose the right trust and complete the forms.

Book a free initial consultation using the enquiry form below. See also our level term life insurance guide, whole of life insurance guide and ultimate UK protection guide.