Life Insurance and Trusts

When life insurance is put in place on the life of an individual, it is designed to pay a cash lump sum on death.

When a claim is successful, the insurer will allocate funds to the claim and, if there are no other arrangements, the funds are paid into the estate of the deceased.

This is not ideal, as in order for surviving family members or friends to benefit from the life insurance, the funds have to be moved from the estate of the deceased into the hands of the people who will benefit (beneficiaries).

This causes a number of potential issues.

Trusts, tax, and timing

Funds passing through the estate of the deceased are affected by various aspects of legislation which mean that:

Tax could be charged on the estate (inheritance tax)

• Debts owed by the deceased will firstly be paid from the estate where appropriate
• There could be multiple unresolved claims on the estate if there is no Will (intestacy)
• The process of distributing the estate can be lengthy and complicated. (This process is known as Probate in England, Wales, Northern Ireland, and Confirmation in Scotland)

Clearly, any life insurance benefits passing through the estate could be delayed or eroded as a result of these issues.

The better result would be if the proceeds of the life insurance policy went straight to the beneficiaries

• without tax
• without delay
• without fuss

This is the purpose of using a Trust arrangement in conjunction with an insurance policy.

It is known as ‘writing the policy in Trust’.

What is a Trust

A Trust is a legal arrangement that allows you to gift your assets without losing control of them.
In conjunction with your life insurance policy, a Trust can ensure that the proceeds of your policy go direct to your intended beneficiaries without delay.
The Trust can also protect against inheritance tax. It is therefore always a good idea to consider writing your policy in Trust whenever you take out a life insurance policy.

Trusts – common terms used

• Asset – an asset is any item of value, for example, a life insurance policy
• Beneficiary – the people or organisation that it is intended will benefit from the proceeds of a Trust
• Estate – anything of value owned by the deceased on death
• Inheritance Tax (IHT) – tax levied on an Estate. (In the 2013/2014 tax year, this is 40% payable on the value of an Estate over £325,000)
• Probate – applying to be able to deal with a deceased persons affairs
• Settlor – the person who creates the trust (usually the insured person and sometimes referred to on Trust forms as the donor)
• Trustee – a person appointed to be responsible for the management of the Trust

Example Trust form

Here is an example trust form as used by Legal and General. The major insurers all provide draft forms of a similar nature. Don’t worry about completing them, your protection adviser can assist you. If you do not have a protection adviser, feel free to call our team on 020 8979 9684.

Writing life insurance in Trust

All major insurers provide the necessary arrangements for a policyholder to write their life insurance policy in Trust. This service is normally free of charge.

In order to write a policy in Trust, the policyholder (Settlor or Donor for the purposes of the Trust) can be provided with standard trust forms to complete and sign. Once completed, these trust forms are noted by the insurer against the policy.

Your protection adviser can assist you with this process on new or existing policies.

Trusts and Critical Illness Cover

Many modern protection policies pay out a cash lump sum if the insured is diagnosed with a critical illness. Since this cash lump sum is claimed whilst the insured is still alive, a Trust may not be appropriate in these cases.

Critical Illness policy providers therefore often offer a specialist ‘split trust’ arrangement whereby the policy can be written in Trust with the death benefits entering the Trust and critical illness benefits (or terminal illness benefits) being paid directly to the insured.

The most common arrangement, is that the Trust in its standard form, allows for the payment of critical illness payments direct to the Settlor, but can be varied when drawn up so that critical illness benefit can enter the trust if the Settlor does not require it.

Writing a Trust – considerations

Here are a number of considerations when considering who to include in your trust.

Beneficiaries – who should benefit on your death, and in what proportion. Trust will generally list potential beneficiaries such as children or grandchildren, but you may wish to be more specific.

Trustees – your Trustees ensure that the right money goes into the right hands at the right time, they are empowered to do this through your nominating them as Trustees in your Trust. A Trustee can be any adult you choose, and you do not have to use a legally or financially qualified or regulated person to act as a Trustee.

It is suggested that a Trustee should be a similar age or younger than you (to reduce the chance of their predeceasing you), financially stable and responsible, and convenient to contact in the event of your death.

You should normally have at least two Trustees and one can be your spouse (but does not have to be).

Witnesses – normally when you sign a Trust as a Settlor your signature needs to be witnessed. It is recommended that your Witness is not also a Beneficiary or a Trustee under the Trust (a friend or neighbour is normally ideal).

Trust types

• Discretionary Trust – under a discretionary trust the trustees can appoint from a range of discretionary beneficiaries.
• Flexible Trust – trustees can appoint from a range of discretionary beneficiaries, but the Settlor has to specify at outset a default beneficiary or beneficiaries. The default beneficiaries will receive any capital from the Trust unless discretionary beneficiaries are appointed.
• Absolute Trust – at outset beneficiaries are specified by the Settlor. If more than one Beneficiary is listed shares can be specified, that share is fixed at outset and cannot be changed.
• Survivors Discretionary Trust – a Trust designed to work with joint life first death policies where, in the event of the death of one Settlor, death benefits are held for the surviving Settlor exclusively. If both Settlor’s die within 30 days of each other the benefits go into a discretionary arrangement.

Which Trust should you use?

Not all providers use exactly the same trust names as above but most will have similar range of Trust arrangements.

Which type of trust is best for you depends on your circumstances.

Absolute Trusts give the Settlor no flexibility. For example if you have two children and name them as beneficiaries, then have a third child, he or she cannot benefit from the Trust. An absolute trust may be suitable for a spouse to spouse arrangement where there are no children involved, or for a single person gifting to charity.

Flexible Trusts allow for changes to beneficiaries so work well if additional children need to be added as beneficiaries at a later date.

Discretionary trusts put the control of the final beneficiaries into the hands of the Trustees. They may be suitable for those with no direct dependents who might wish to leave decisions on beneficiaries on their death to others.

Survivors trusts are suitable only for policies which are written on a joint life first death basis (two people covered by the plan, but proceeds paid only once).

This page is intended as a guide only. It should not be considered financial advice. If you wish to put your policy in place obtain advice from a suitably experienced and qualified person

The post Life Insurance and Trusts appeared first on A Mortgage Now.

Most people understand life insurance. You pay your premiums and your dependents obtain cash. Anyone with financial dependents needs life insurance coverage as part of their financial planning arrangements.

But what happens if you are seriously ill but survive? A critical illness can severely affect your lifestyle. You may find that you cannot work the same hours as previously or in the same way, and this can affect your financial position.

Critical Illness Insurance protects you at a time when most vulnerable. If like most of us you have mortgages, loans, or financial dependents, critical illness cover should be considered.

Critical Illness Insurance to protect your home

You should use a critical illness policy to cover your outstanding mortgage. In the event of you suffering a critical illness, your mortgage would be repaid, and your major financial commitment will be resolved at a difficult time in your life.

Critical Illness Insurance to protect your family

Protect your family with a critical illness policy. In the event of you suffering a critical illness, a cash injection would remove your worries about maintaining the household budget.

Critical Illness Insurance to protect your business

What happens if a key employee in your business suffers from a critical illness? Would this lead to lower profits? Could your entire business be at risk? Taking key man cover with a critical illness insurance policy on your employee would provide a cash injection to safeguard your business.

Critical Illness Insurance – Main areas of claim – Cancer

Cancer is a term describing medical conditions where cells grow in an uncontrolled manner. Cancer is particularly dangerous as it can spread through a process called metastasis.

In the UK, 300,000 cases of Cancer are diagnosed each year.

Although there are hundreds of different types of cancer, the most common types in the UK are:

breast cancer
prostate cancer
lung cancer
bowel cancer
bladder cancer
womb cancer

You can reduce your risks by being a non-smoker, watching your weight through diet and regular exercise, and limiting your alcohol intake.

Critical Illness Insurance – Main areas of claim – Heart Attack

A heart attack occurs when blood flow to the heart muscle is blocked. Loss of regular blood flow leaves the heart muscle damaged from lack of oxygen. Given the treatments available today, many heart attack sufferers survive if treated quickly. In England alone, there are 111,000 heart attacks each year. Half of these patients will survive and live for many more years.

After surviving a heart attack, the last thing you need is stress through financial worries. Critical illness insurance cover can prevent this.

Most heart attacks are caused by coronary artery disease (CAD). In this condition, fat builds up in the walls of the arteries leading to an increased risk of blood clots forming.

Signs of a heart attack:

Chest discomfort – feelings of pressure or squeezing
Chest pain – strong or mild
Pains in the upper torso and arms
Breathlessness
Sweating or nausea
Dizziness or fainting

If you have any concerns, get medical help fast.

To reduce your risk of a heart attack, stop smoking, get regular exercise, and avoid fatty foods.

Critical Illness Insurance – Main areas of claim – Stroke

When you suffer a stroke, the blood supply to a part of your brain is cut off. This can cause damage or death to brain cells.

Strokes can lead to loss of speech, sight, hearing, mobility, or confusion. A stroke victim may never be in a position to return to their previous occupation.

If you suspect a stroke, use the FAST test.

Face – Has the person’s face altered shape, and can they smile?
Arms – Can they raise both arms?
Speech – Can they speak, listen and understand?
Time – Get medical help quickly should you have any concerns.

Critical Illness Insurance Examples

Doctors experiencing critical illness

Here at A Mortgage Now we are strong believers in our clients protecting themselves and their families through life and critical illness insurance.

Recent events affecting two of our clients justified our faith in critical illness protection.

What is particularly powerful is that both of these clients are Medical Doctors and are more used to supporting others than having to deal with the consequences of serious illnesses themselves.

Thankfully they have both survived to tell the tale, and we were grateful that they were prepared to talk to us about their experiences of critical illness insurance.

Read their stories below – we have altered our clients’ names to protect their privacy. We asked Richard about his experience with critical illness insurance

The post Mortgage Critical Illness Insurance appeared first on A Mortgage Now.

Mortgage life insurance is a valuable protection that you should arrange alongside your mortgage so that if the unexpected happens, you are fully prepared.

Prepare for the unexpected with mortgage life insurance

When you buy your property with a mortgage, it will probably be the biggest financial liability you take on in your lifetime. You may be taking this step on your own, or there may be others involved such as a spouse, a partner, or children. Whatever the situation, you need to consider your situation if the unexpected happens and you cannot make the mortgage payments. For example, if you were to die, or, become sick and unable to work.

What do you want to happen?

The first question you should ask yourself is, if you were to die before the mortgage was repaid, what do you want to happen?

Who would own the property on your death, would they continue to pay the mortgage, would they be in a position to do this, what would happen if they could not pay?

All these questions need to be asked, answered, and resolved before your mortgage is in place. We see too many of our clients dying or becoming seriously ill during the term of their mortgage to take anything but a serious approach to mortgage protection.

Planning with mortgage life insurance

Fortunately, the answers are all to hand and available via your independent mortgage broker. Subject to your health, you can arrange a life insurance policy that pays out cash on your death sufficient to repay the mortgage in full. Monthly premiums are not expensive, particularly when you consider the piece of mind it will give you and your family.

What about critical illness cover?

Further to this, you should consider what would happen if illness prevented you from working and earning the income you need to repay your mortgage and cover other bills.

Once again, we can provide you with protection to ensure that sickness does not create an issue with your mortgage payments. If you arrange critical illness cover, the policy will pay off a lump sum on diagnosis of a number of serious illnesses such as heart attack, cancer or stroke, removing your biggest financial liability at a time when your future lifestyle and working patterns will be coming into question.

Mortgage Life Insurance – The process

In order to arrange mortgage protection, you will need to provide some medical background. The insurer will also ask questions about your occupation. Depending on the level of cover required, they may write to your doctor for a medical report. In some cases, you may be asked for a simple medical check where height, weight, blood pressure, and other simple parameters are checked. These types of medical checks can be arranged at your own home or place of work if more convenient.

How we help

Your independent mortgage broker will guide you through the decisions and arrangements for mortgage life insurance and make it easy for you to get the cover in place and provide you with the stability that you and your family deserve.

Searching the whole of the market

Although premiums from insurers will tend to be within ten to fifteen per cent of each other, it is worth making sure that you are getting quotes from a range of providers. Each provider will see a particular age group as more attractive and then price accordingly. Smokers should expect to pay additional premiums due to the additional risks involved to the insurer.

Non-standard risks

If the insurer does consider you have an unusually increased risk, perhaps due to family background, or previous medical history, they may offer you special terms. In this case, the insurer will ask you to pay a slightly higher premium in order to contribute towards the extra risk. Again, this is something that your adviser will be used to dealing with and will be able to guide you through.

When to arrange your mortgage life insurance

One other important point to remember is that your mortgage protection should be in place from the day you exchange contracts, as that is the point at which you are committed to the purchase and therefore the liability.

The post Mortgage Life Insurance appeared first on A Mortgage Now.