Trusts for Life Insurance & Critical Illness Cover
Why Put Your Life Insurance in Trust?
Setting up a trust for your life insurance or critical illness cover is one of the smartest decisions you can make for your family. It's a simple legal arrangement that ensures your payout goes to the right people, at the right time, with the right amount of money—without unnecessary delays, taxes, or complications.
Our advisors can arrange trust set-up as part of your protection planning, giving you peace of mind that your loved ones will be looked after exactly as you intend.
The Three Key Benefits of a Trust
Right Money
When your life insurance is held in trust, the payout doesn't form part of your estate. This means it can avoid inheritance tax, potentially saving your family thousands of pounds. The money goes directly to your beneficiaries tax-free, ensuring they receive the full amount you intended—not a reduced sum after tax deductions.
Right People
A trust lets you decide exactly who receives the payout and in what proportions. You can name your spouse, children, or anyone else you choose as beneficiaries. This is especially important if you have children from previous relationships, dependents with special needs, or specific wishes about how the money should be distributed. Without a trust, the payout could be subject to probate and distributed according to intestacy rules—which might not match your intentions.
Right Time
One of the biggest advantages of a trust is speed. Because the policy payout doesn't go through probate, your beneficiaries can receive the money in weeks rather than months (or even years). When your family needs financial support most—to pay the mortgage, cover funeral costs, or manage daily expenses—they won't be left waiting for legal processes to complete.
Types of Trusts
Standard Trust (for Life Insurance)
A standard trust is typically used for life insurance policies. It ensures the payout goes directly to your named beneficiaries when you pass away, bypassing your estate and avoiding probate. This is the most common type of trust for family protection policies.
Split Trust (for Critical Illness Cover)
A split trust is designed specifically for policies that include critical illness cover. It works by splitting the benefit between you and your beneficiaries:
- If you're diagnosed with a critical illness – The payout goes to you (the policyholder) so you can use it for medical costs, adaptations, or living expenses.
- If you pass away – The life insurance element goes to your named beneficiaries through the trust, avoiding probate and inheritance tax.
This flexibility makes a split trust ideal for combined life insurance and critical illness policies, ensuring the money goes to the right person depending on the circumstances.
How Does Setting Up a Trust Work?
Setting up a trust is straightforward and usually completed at the same time as your life insurance or critical illness policy. Your advisor will:
- Explain which type of trust is right for your policy and circumstances
- Help you choose your beneficiaries and trustees
- Complete the trust paperwork on your behalf
- Ensure everything is set up correctly with your insurance provider
There's typically no additional cost, and it only takes a few minutes to arrange. It's a small step that makes a huge difference for your family.
Who Should Consider a Trust?
A trust is beneficial for almost everyone with life insurance or critical illness cover, but it's especially important if you:
- Want to avoid inheritance tax on your life insurance payout
- Have children from previous relationships and want to ensure they're provided for
- Want your family to receive the money quickly without waiting for probate
- Have dependents with special needs who require long-term financial support
- Want control over how and when the money is distributed
- Have a combined life insurance and critical illness policy (split trust)
Frequently Asked Questions
Does a trust cost extra?
In most cases, setting up a trust is included as part of your life insurance or critical illness policy at no additional cost. Your advisor will confirm this when arranging your cover.
Can I change the beneficiaries later?
Yes, most trusts allow you to update your beneficiaries if your circumstances change—for example, if you have more children or your relationship status changes.
Who are the trustees?
Trustees are the people responsible for managing the trust and ensuring the payout goes to the right beneficiaries. You can choose trusted family members, friends, or professionals. Your advisor will help you decide who's best suited.
What's the difference between a trust and a will?
A will distributes your estate after you pass away and goes through probate, which can take months. A trust sits outside your estate, so the life insurance payout goes directly to your beneficiaries without probate—faster, simpler, and often tax-free.
Do I need a solicitor to set up a trust?
No, your financial advisor can arrange the trust as part of your life insurance or critical illness policy. It's a straightforward process that doesn't require legal involvement in most cases.
What happens if I don't put my life insurance in trust?
Without a trust, your life insurance payout becomes part of your estate. This means it could be subject to inheritance tax, probate delays, and may not go to the people you intended—especially if you don't have a will.
Get Expert Advice on Trusts
Our independent advisors will explain trusts in plain English and help you set up the right type for your policy and family circumstances. It's a simple step that protects your loved ones and ensures your wishes are carried out.
Get in touch today to discuss your life insurance, critical illness cover, and trust options.
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