Life Insurance - Written in a Trust

jacsll55

Is it good to have a Trust for life cover on a mortgage?

SonOf

In the majority of cases, no it is not.

Weighty1

It can depend.

Is the mortgage held with someone else?
Are you married to that other person?
Is the life insurance a single life or a joint life plan?
Is there likely to be an inheritance tax liability on your estate?

In general it is not required but in some instances it can be almost vital to have a plan in trust to ensure the right person receives the money.

SonOf

Also the sum could form part of any inheritance liability if not written in to trust.

Although the purpose of life assurance covering a mortgage is to repay the debt. So, the life assurance cancels out the debt making no difference to IHT.

If joint owner, joint life, first death, then the policy pays out to the surviving owner without any delay due to probate etc. As "most" people with a life assurance need will have joint mortgages or be on a joint basis financially, the need for a trust isn't there when JLJOFD.

There are niche cases where it may be appropriate but whilst you say you would always recommend it, I would say that in most cases, it is not necessary. If we were talking about family protection on the other hand, or sole owner policies, then I am with you all the way.

Weighty1

SonOf wrote: »

Although the purpose of life assurance covering a mortgage is to repay the debt. So, the life assurance cancels out the debt making no difference to IHT.

I'd disagree with that.

Single person with a home valued at £500,000 with a £175,000 mortgage and on other assets. If the life insurance is written in trust the value of their estate in £325,000 (property - debt) so no IHT. If the life insurance pays into the estate it is then worth £500k so an IHT liability of £70,000 arises.

SonOf

Single person with a home valued at £500,000 with a £175,000 mortgage and on other assets. If the life insurance is written in trust the value of their estate in £325,000 (property - debt) so no IHT. If the life insurance pays into the estate it is then worth £500k so an IHT liability of £70,000 arises.

Why would a single person need life assurance? (assuming no partner as if there was, they would take out a joint policy).

csgohan4

SonOf wrote: »

Why would a single person need life assurance? (assuming no partner as if there was, they would take out a joint policy).

Because the younger they are, the cheaper it is and less likely to have medical issues.


Taking out life insurance when your older and married will likely be more expensive


personal preference of course. I've known people who are the wrong side of 30 and having minor ailments in the past can load the premiums a little bit




You don't have to be married to have life insurance, you just need to update your will accordingly to who the money goes to


Weighty is spot on regarding IHT thresholds, I have 500K in total of insurance cover split 50/50 into two trusts for the 2 separate policies which is 250k each.

Weighty1

csgohan4 wrote: »

Weighty is spot on regarding IHT thresholds, I have 500K in total of insurance cover split 50/50 into two trusts for the 2 separate policies which is 250k each.

And therefore at each periodic review is there'd been a claim there'd be less than £325,000 in each trust and no 6% periodic charge applied. Bingo!!

Weighty1

SonOf wrote: »

Why would a single person need life assurance? (assuming no partner as if there was, they would take out a joint policy).

Just because you have a partner doesn't necessarily mean you'd want a joint plan. They may have their own assets and wish to leave them to family, as may this single person. They could have children. They may not want their parents to have the hassle of maintaining the mortgage after their death. There's a multitude of reasons why a single person may want to have life insurance.

csgohan4

Weighty1 wrote: »

Just because you have a partner doesn't necessarily mean you'd want a joint plan. They may have their own assets and wish to leave them to family, as may this single person. They could have children. They may not want their parents to have the hassle of maintaining the mortgage after their death. There's a multitude of reasons why a single person may want to have life insurance.

I guess people don't advise to have it when your single is the cost as well as who they will be passing it on to.

But I think the sooner you have life insurance, and you can afford it before you have a partner the better overall for costs imo.

SonOf

But I think the sooner you have life insurance, and you can afford it before you have a partner the better overall for costs imo.

I have seen FOS decisions that have upheld complaints where the person was single with no dependants (financial or otherwise). I have also seen them reject it on the basis that a mortgage is a long term contract and you may get a partner later.

They may have their own assets and wish to leave them to family, as may this single person.

I was mainly focusing on financial need rather than a choice where there is no financial need. (although choice can sometimes be a financial need. i.e. house been in the family for 300 years and they want that to continue if they die)

They could have children.

Which would likely introduce a financial need and a trust situation.

They may not want their parents to have the hassle of maintaining the mortgage after their death.

Parents are not liable to pay the mortgage. Most lenders will roll the interest onto the debt and await settlement from the executor through sale of house. In some cases, lenders will freeze interest on the mortgage for a period.

There's a multitude of reasons why a single person may want to have life insurance.

But for the vast majority of single people with no dependants (financial or otherwise) there is no point. Most financial products cannot have a simple 100% accurate flow chart style answer as there will always be someone with certain variables that would break the flow chart.