Estate planning can be a complex process, with many factors to consider in order to ensure your wishes are carried out after you're gone. Life insurance is just one tool that can help provide for your family/loved ones and settle your affairs.

Understanding how life insurance can fit into your estate plan is crucial for making informed decisions about your financial future.

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What do we mean by an 'estate'?

An estate refers to all assets and liabilities that a person owns at the time of their death. This can include things like property, investments, savings accounts, personal belongings, and more. When someone passes away, their estate will need to be distributed according to their wishes as outlined in a will or trust.

Once you pass away, it's vital to have a will in place to specify how you want your estate to be distributed. If you do not have a will, intestacy laws will determine how your assets are divided amongst your family.

Is a life insurance policy part of an estate?

Following a successful claim on your life insurance policy, the funds would be paid into your estate, where they may go through probate before being received by your beneficiaries. Depending on the size of your estate, the funds may go through inheritance tax before becoming available.

Is my policy subject to inheritance tax?

This will depend on your circumstances and the overall size of your estate. By default, your payout will form part of your state. 

If your total estate is under the threshold, then the funds won’t need to go through inheritance tax.

If your estate is over the threshold for inheritance tax, the funds from your life insurance could be subject to inheritance tax. One way to keep them exempt from inheritance tax is to write your policy in trust. Writing your policy in trust ensures that the funds go directly to your beneficiaries and do not enter your estate.

What do we mean by 'beneficiary'?

Life insurance beneficiaries are the people or body chosen to receive the proceeds from your policy. This includes:

It's important to review your beneficiaries regularly and update them as needed, especially in the event of major life changes such as marriage, divorce, or the birth of a child. By keeping your beneficiaries up to date, you can ensure that your loved ones are provided for.

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What is life insurance probate?

When a person passes away, someone must handle the process of settling their affairs and distributing their assets. This legal process is known as probate. Whether probate is necessary will depend on the value of the estate and whether the assets are jointly owned.

If there is a need for probate due to a written will, you will have to apply for a grant of probate, also known as the grant of representation. This grant will provide you with the legal authority to access bank accounts, sell assets, and handle the owners estate.

Once you are granted probate, you must follow specific rules for distributing the assets to the beneficiaries.

How does the probate process work?

The processing of a life insurance payout will vary depending on how the policy is structured. If it was not written in trust, the payout will be considered part of the policy owner's estate and will have to go through probate.

The policy pays out a lump sum into an account held by the executor of the will and may be subject to inheritance tax before being distributed to the beneficiaries.

On the other hand, if the policy is written in trust, the payout will directly go to the beneficiaries without the need for probate. This means that your loved ones can receive the money much more quickly.

What does it mean to write your policy in trust?

Writing your life insurance policy in trust means transferring ownership of the policy to a trust. By doing so, the policy proceeds will not be considered part of your estate for tax purposes. Instead, the funds will be held and managed by a trustee on behalf of the beneficiaries you have designated.

There are several benefits to writing your policy in trust. First and foremost, it can help ensure that the proceeds from your policy are distributed according to your wishes and not subject to inheritance tax.

Writing your policy in trust can also provide added protection for the funds. They will be held separately from your other assets and creditors may not be able to access them.

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Need advice? We're here to help

If you have questions about how life insurance policies and inheritance tax may impact your estate, or if you are considering writing your policy in trust, it's important to seek advice from a financial advisor or estate planning solicitor. They can provide guidance on the best options for protecting your assets and ensuring that your loved ones are provided for after you pass away.

You can also speak to one of our experienced advisers, who can answer any questions you have regarding life insurance. They can help answer any questions you may have about your policy and provide recommendations based on your individual circumstances. Speak to an adviser today to get started.


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