Life insurance

joe427

Just a quick question.

If a life insurance policy is put in trust, and the policy was taken out - can this lump sum of money be used to pay off a mortgage or to keep up regular payments?

I've seen that its best not to write a life insurance policy in trust for a mortgage but couldn't see what was stopping you from doing so unless this means the life insurance designed purely for mortgages.

I just wanted to confirm what this payment would cover should the worse happen!

ACG

The payment will get paid to the beneficiary (it will avoid probate so gets paid sooner - which is the benefit of a trust), the beneficiary can then do whatever they like with the money. It may be paying off the mortgage, it may be moving to Rio and living the life of riley.

If its a joint policy, assuming there is no trust it will just get paid to the surviving person anyway.

busicat

joe427 wrote: »

If a life insurance policy is put in trust, and the policy was taken out - can this lump sum of money be used to pay off a mortgage or to keep up regular payments?

Yes, it's as ACG says....as long as the beneficiary has also been added as a trustee (sadly can't always assume this gets done...and if not it's still waiting for probate before the beneficiary gets the cash.)

I've seen that its best not to write a life insurance policy in trust for a mortgage but couldn't see what was stopping you from doing so unless this means the life insurance designed purely for mortgages.

Some years ago, the policy would be assigned to the mortgage lender, so you couldn't put it under trust. Most lenders stopped doing that a while ago though, so putting a (non-joint) policy under trust for the person left with the mortgage and other bills gives them the option of how to use the money. Even if it's a decreasing sum assured designed to go down like a repayment mortgage balance.

Important to be joint mortgage holders though... I know of someone who inherited his partner's house and could afford to keep paying the mortgage, but the mortgage company wouldn't let him take it over as no longer working. They insisted on sale of the house (and with it the land he kept his horses on). Complete nightmare: no partner, no house, no horses and forced return to work from early retirement. Life cover to clear the whole mortgage would have sorted it, but I don't know if they'd have let him just use the capital to make the monthly repayments. Sounds like not, as he was going to be paying out of capital anyway.

weighty1_2

If the mortgage is a joint mortgage and the surviving partner wishes to repay the mortgage it is fine to write the life insurance into trust as it ensures the right person get the money asap.

The problem lies when the mortgage is in a sole name. The life insurance pays out into the trust and when the mortgage provider come along to deal with the outstanding liability there aren't the assets within the estate to repay the mortgage.

busicat wrote: »

Yes, it's as ACG says....as long as the beneficiary has also been added as a trustee (sadly can't always assume this gets done...and if not it's still waiting for probate before the beneficiary gets the cash.)

The beneficiary does not have to be a trustee. Irrespective of who the trustees are the proceeds will pay into trust and bypass probate or the process of intestacy.

busicat

weighty1 wrote: »

The beneficiary does not have to be a trustee. Irrespective of who the trustees are the proceeds will pay into trust and bypass probate or the process of intestacy.

OK, agreed, the surviving additional trustee doesn't have to be the beneficiary.

But the point is that to avoid the probate delay there must be at least one trustee who can give the insurer a legal discharge of the policy.

And in practice, for most couples, it makes sense if that person is the one who is intended to get the money anyway. I, for one, wouldn't want anyone else involved.

weighty1_2

busicat wrote: »

OK, agreed, the surviving additional trustee doesn't have to be the beneficiary.

But the point is that to avoid the probate delay there must be at least one trustee who can give the insurer a legal discharge of the policy.

And in practice, for most couples, it makes sense if that person is the one who is intended to get the money anyway. I, for one, wouldn't want anyone else involved.

Absolutely! I try to recommend having at least 2 trustees when there are dependent children, simply to ensure continuity and the trust remaining valid if both the life assured and their spouse die in an accident but when it's just to protect two partners then I feel that one trustee is adequate and make things nice and simple.

busicat

sounds good to me, weighty1

magpiecottage

weighty1 wrote: »

The problem lies when the mortgage is in a sole name. The life insurance pays out into the trust and when the mortgage provider come along to deal with the outstanding liability there aren't the assets within the estate to repay the mortgage

I looked into this a long time ago with the legal team of a life office.

We concluded that in fact the problem was if it wasn't in trust.

This is because, without an assignment of the policy to the lender, the proceeds must be paid into the estate and then gets tied up in probate. In the meantime the loan still has to be serviced.

If it is in trust the surviving family are paid the money and can say to the lender "here you are".

When policies were assigned this problem did not arise because the lender had first claim on the policy.

The trust arrangement can also avoid Inheritance Tax.

Although conventional wisdom says there is a corresponding debt, if the policy is in trust, the debt can be set off against other assets.

In most cases that probably doesn't matter but in the South East, in particular, there could be enough equity in a property that Inheritance Tax will be payable so a trust arrangement could enable a substantial saving.