'Life of Another' insurance versus putting life insurance into trust

peteduk

Hello,
I have just taken out life insurance and was considering putting it into trust so that it is paid out 'immediately' on death - having heard of probate delays etc.
My consideration is that the full sum insured is not needed if my wife predeceases me so if that happens I would like to cancel that policy and take another to cover funeral costs etc (my wife is 12 years older than me and in her mid 70s). In my opinion the premium is too high if not needed.
I understand if I put my policy into trust it cannot be cancelled unless all trustees agree which gets complicated.

I have just read that my wife could take out a policy against my life (Life of Another). I believe this would have the same effect. (A necessary qualification is that she has a financial interest in my death which she does as I have the main income provider).
I would then cancel the policy I have taken.

Does anyone see any disadvantages with this? Or additional costs involved?
I used a MSE recommended broker to take out my existing policy, and would probably try the same route for the policy in my wife's name. Or, does anyone think LG would be able to make a policy modification?

Thank you for your help,

Weighty1

A policy cannot be 'cancelled' unless all the trustees agree, however, if you wished the plan to be cancelled then you could always just cancel the direct debit mandate.  The insurance company would write to the trustees to notify them of missed payments but unless any of the other trustees wished to pick up the cost of the cover then the plan would just lapse after normally 1-2 months.

Personally I feel that a plan is trust would be more beneficial than a life of another plan because if the money pays directly to your wife on your death then this could impact her eligibility to any state benefits that she may be entitled to if the money had gone into trust, thereby unecessarily depriving her of potential extra income.

If the current plan is not in trust then L&G may be able to amend the existing plan via a 'deed of assignment' which basically changes you from being the policyholder to your wife becoming the policyholder.

peteduk

Thank you for your reply.
You will see below that I need to think some more about this....

I hadn't thought about the implications for state benefit eligibility. My thoughts were to 'tide her over' until probate was sorted. And yes her income may then well be so low as to qualify for benefits.
We've paid for private healthcare recently but assuming this or similar doesn't erode all savings then my image is that that the remaining savings would be used for living so the problem may already exist after probate.
However I take on board that if some money is protected that would be a good thing.

I obviously need to find out more as I thought the proceeds from the life insurance policy would be paid out, but then there could be no distinction between that and other monies.

L&G are willing to place the insurance into trust but that doesn't satisfy my objective if my wife dies before me.
I will also ask them about a deed of assignment.

As you say I believe that if the policy is in trust that yes, it will be cancelled by non payment of the direct debit. But I assume that the trustees could then theoretically make a claim against me for a benefit to be paid.

I'm starting to think I am overcomplicating this.....

Weighty1

peteduk said:

As you say I believe that if the policy is in trust that yes, it will be cancelled by non payment of the direct debit. But I assume that the trustees could then theoretically make a claim against me for a benefit to be paid.

I'm starting to think I am overcomplicating this.....

What makes you think the trustees could make a claim against you and on what basis would that be for?

Ultimately, if the purpose of the life insurance is to protect your wife's standard of living but your wife pre-deceases you then the need for the cover has gone.  The trustees are not liable for missed payments, the insurance company simply write to the trustees to warn them that the plan is at risk of 'lapsing'.  They would only need to pay the missed premiums if they decided that they wanted the cover to remain in place but how likely is that based on the need for the cover, your wife's standard of living being protected, no longer being present?

If L&G could offer a deed of assignment to change the ownership of the plan it is theoretically becoming a 'life of another' policy at that point and then still suffers the issues raised in my first comment.

Personally, in my opinion, I do feel that you are over complicating this.  Ultimately, a trust ensure prompt payment, to the right person/people, whilst protecting the money against IHT claims and protecting the beneficiary against deprivation of other state benefits.  It does tie you into paying for the policy as it can be cancelled via a quick cancellation of the d/d.

The main downsides of trusts are for young families when spouses, who then become ex-spouses further down the line, are trustees of a policy and refuse to work co-operatively with the settlor (the life assured).  Other than that, I would suggest trusts are by far the best way of ensuring the right person receives the proceeds.

peteduk

Thank you again Weighty1. I appreciate your feedback.
My reason for thinking the trusees may make a claim was because I was reading information related to a L&G discretionary trust. I.E.
"Once the trust has been created it cannot usually be cancelled before it has served its purpose and the policy cannot be cancelled without the permission of the trustees."

But I have now just found this in similar L&G documentation for an absolute trust.

"What can the trustees do if I don’t pay the policy premiums? As legal owners of the policy, the trustees can arrange for the premiums to be paid but they are not obliged to make sure this happens or pay the premiums themselves. The trust will come to an end if, as a result of the premiums not being paid, the policy lapses with no value"

So it seems an Absolute trust will meet my needs because if my wife is the only beneficiary, and my wife predeceases me, then the likely trustees won't object because they are not beneficiaries.

Can anyone see any downsides to this?

Thank you

Weighty1

Do you have any concerns over inheritance tax (IHT)?  If so a Discretionary or Flexible trust is preferred as no one individual has guaranteed ownership of the trust funds, whereas with an Absolute trust your wife would be the guaranteed beneficiary and therefore on her death the money in trust would be assessed as part of the estate.

peteduk

Thank you again Weighty1.
I really appreciate that you are making me think, and learn.....

From https://www.gov.uk/inheritance-tax:

There’s normally no Inheritance Tax to pay if either:

• the value of your estate is below the £325,000 threshold
• you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

If I die first, everything is being left to my wife so I believe there should be no liability. (Hope!)
There are some confusing (to me) statements on the gov.uk site regarding trusts and inheritance tax but I am assuming that the above will overrule that.

Are there any other potential disadvantages that I need to consider?
Thank you,

Weighty1

One thing worth noting is that if the life insurance is for a sum assured of more than £325,000 then a 'periodic charge' would likely be payable at a rate of 6% above the IHT threshold at each 10-year anniversary of the trust being formed.  So for example, if you put the trust in place, then died at 9-years 360-days after the trust was written the 6% would be payable IF the money remained in the trust 5-days later on the 10-year anniversary.  If the money was quickly withdrawn and the value of funds within the trust was below £325,000 then no periodic charge would be payable but then there's the issues of your wife having the funds within her estate and how that affects entitled to certain state benefits.

The easiest way of avoiding the periodic charge is to set up multiple policies, each with a value under £325,000 if necessary but I appreciate your policy is already in force.

Trust law can be incredibly complex so specialist advice would be recommended on this normally.

peteduk

Hello Weighty1,
Thank you again for your support and advice.
In the end I 'grew up a bit' and decided that I would not end payments in the event of my wife dying before me, and that I would trust the trustees to do the right thing in all cases. So I have created a discretionary trust with a 'statement of wishes'.
Please don't think I have wasted your time. Your answers were very helpful.
The guidance regarding values did not apply to me but I do appreciate you thinking round those issues in case they did.