Life Insurance - What if we both die?

mazkiwi

Hello
My husband and I have had a joint life insurance policy for some time. It's a £100k pay out should one of us die.

Now we have three children and would like to ensure they (or our Will executors) can get the money quickly so they can pay the mortgage while sorting probate etc... Also we don't want the insurance money to be taxed when our children (aged 14, 12 and 7) would definitely need it more than the govt!

Aviva cannot legally give us a steer - so have confusingly - sent us two forms. One is a Survivor Trust, the other, a Discretionary Gift Trust.

Is there a simple way we can ensure the money is used as it has always been intended, in full - to make things easier in the immediate aftermath of a family crisis? Which is the best form...? Perhaps we should get legal advice but if it is simply a matter of filling out a form I would prefer to do it myself to avoid solicitors fees... Hope you can help!

InsideInsurance

Did you buy the policy direct from Aviva or via an intermediary/ broker?

Most insurers are non-advisory which is why they say they cannot advise you but many intermediaries are advisory so would be able to tell you whats best to do given your circumstances and desires.

mazkiwi

We bought it from an independent financial advisor who is no longer working... annoying I know...

agrinnall

Whether you need to get complicated really depends on how much your estate will be worth if both of you die at the same time. If it's less than £650K including the insurance pay out (it's not clear to me whether that would be £100K total or £100K each) then there would be no IHT due anyway. It's only if the estate is worth more than that when trusts might be useful.

And I'm not sure there is any need to worry about mortgage payments, I would expect lenders to be used to there being a delay until the will is sorted out.

magpiecottage

It is a long time since I saw a Norwich Union form (and it dated from the mid 1990s.

However, assuming you are in good health when the trust was established, it will be deemed to have no value at that point in time and the premiums will be gifts out of regular income which do not affect your standard of living.

If you fall seriously ill afterwards, the policy may be considered to have acquired a value because, being blunt, there is a higher chance that you will die and the policy pay out but it would then be owned by the trust, not you and so there would be no inheritance tax to pay.

That is a good reason to put the policy into trust if your estate is above the inheritance tax threshold or likely to become so in future.

However, agrinnall is incorrect in saying it is the only reason.

On death, your insurance company will need to see proof of your dates of birth if it has not already done so, the death certificate and possibly the policy document back.

If it is in joint names and one of you dies it would normally then pay out to the survivor as the sole living owner.

However, if there is no surviving owner they must wait for probate on the last living owner to be granted. That can easily take a couple of months.

In the meantime, although it is unlikely that the lender would aggressively chase for its money, interest would continue to accrue.

If the policy is in trust then the policy would be able to pay out immediately to the trustees.

If a policy is on a single person's life then any death benefit should usually be put into trust but with a joint life first death it is less clear as, to be effective for tax purposes, it needs to exclude the surviving policyholder from benefitting.

agrinnall

What on Earth has magpiecottage done to be PPR'd in the last 90 minutes?

Anyway, I'm sure s/he is right to say that my answer on trusts was incorrect, I was just addressing the IHT issue but of course there are other considerations that could make a trust worthwhile as noted?

mazkiwi

Thank you for your replies. The policy is just a £100k pay out if one or other (or both) of us dies - it does not include illness cover. Solely focuses on us kicking the bucket as it were.

I'm not particularly concerned about anything other than the tax side of things. I was not aware, until recently, that the govt could tax that money. The only reason we got the policy was to help tided us over if one of us dies - not to give a share to the govt!

If we both die, say in a car crash, we do not want our kids to have to pay tax on that money either. Our estate is worth more than £650k so it could be liable I understand...

The question is: should we fill out a form ourselves (preferable from our point of view) and if so - of the two forms we have been sent which is the best? Is it Aviva's Discretionary Gift Trust or Aviva Survivor Trust?

MightyMythop

I understood that if you complete a Discretionary Trust this eliminates the tax issue plus you can effect a "Letter of Wishes" that will assist the trustees in how you want the monies to be distributed.

Aviva should have their own "Letter of Wishes" I would have thought.

mazkiwi

Okay I will ask them thank you for that... anyone else have any suggestions re the best form to fill out? Thanks in advance...

Murphy2011

Not sure about AVIVA but a lot of providers including the one I work for have a Survivorship clause in trust forms, this is specifically to cover the issue of what happens if you both did in the same car accident for example.

If this happens then the Survivorship clause works like this, the older person is deemed to have died first so the provider would look to pay the younger. The younger has also died so without the Survivorship Trust that money would then go into the estate of the youngest of you and could be liable to Inheritance Tax if paid to your children. The ST works like a secondary trust, it only comes into play if you both die, normally within about 30 days of each other. It just means that the money can be paid to a second beneficiary which in this case would be trustees for the benefit of your children. That way there is no IHT & also the money gets paid out straightaway for the children rather than being stuck in an estate.

Set up wills nominating people you trust to look after the children & then the ST could be used to these same people perhaps could be trustees on the life plan as well.

Obviously it would be a really good idea to speak to an expert on this such as another adviser, try looking at unbiased.co uk and you should find an IFA who can help...I'm not legally allowed to give advice!!!!