Types of Trust for Life Insurance
Written by Steve Wentworth
Thursday, 1st July 2010
Introduction
Most life insurance companies in the UK offer a free
services for placing your life cover into trust. This article explains the different types of trust available for
your life insurance and why you should seriously consider placing your policy in trust.
What is a trust?
Trust allow you to make a gift to a beneficiary whilst maintaining
some control over who benefits from it and when it becomes available. Instead of the gift
being passed directly to the intended beneficiaries, it is transferred to and held by people
known as trustees. The gift can be anything from a house to a life insurance policy.
Throughout this article we will only consider life insurance policies or combined life and
critical illness policies.
What is required to form a trust?
There are four key parts to a trust: -
- Settler – Customer or owner of the life insurance policy.
- Trust Form – The legal document which formulates the trust.
- Trustees – Key individuals appointed to by the settler as trustworthy
to ensure the settlers wishes are acted upon.
- Beneficiaries – The individual(s) who will benefit from any proceeds.
A trust form may also require a witness to counter sign each of the sections.
Types of trust
There are two types of trust when used for the purpose of life cover.
These are Base or Absolute Trust and Discretionary Trust.
Base or Absolute Trust
An absolute trust is where the settler knows from the outset who the
beneficiary will be, and that the beneficiary will NOT change. This type of trust is rarely
used these days due to the flexibility offered by the discretionary trust however one good
use of the trust would be where a life insurance policy is taken out to protect the interests
of children from a previous marriage. As the children are known and will not change in the
future the absolute trust trust would be ideally used here.
Discretionary Trust
A discretionary trust is where the settler puts control of the beneficiaries
to the trustees. The trustees will decide who will benefit from a wide range of potential
beneficiaries including the family, they will decide at what time and in what share each
beneficiary will receive. To help the trustees the settler can give them a written guidance
on their latest wishes. This type of trust is extremely flexible and provides a degree of
control over the beneficiaries.
Split Discretionary Trust
Where a life insurance policy includes terminal illness benefit and
critical illness cover a split discretionary trust can be used, this provides the added
benefit of paying out the lump sum to the settler if he suffers a critical illness or diagnosed
with terminal illness, but if they suffer loss of life the discretionary trust would apply.
About the author
Steve Wentworth formed his firm Wentworth Financial Services in November 2007
having been in the industry since November 2002. We offer a free service to see if we can add
your Life insurance written in trust or if you
would like a free life insurance assessment.
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