Few advised protection policies are being written in trust. There are reasons for this and contractual nomination of beneficiaries could provide an alternative solution, explains Gregor Sked, senior protection technical manager, Royal London.
Why trusts matter
With most term life policies being written as single own life cover, something needs to be done to ensure the whole of the death proceeds reach the intended person.
Leaving this type of policy to go through the estate creates the risk of months of delay to payment, as well as not all intended money being available to the bereaved partner.
If there isn’t a will, cohabiting partners stand to lose everything, and even married couples may have to hand over some of the money to offspring – which, as indicated by a recent survey, could be up to 66% *in Scotland. Even with a will, creditors, and sometimes other family members, have the first claim on money available, and of course, HMRC takes a cut of the estate for nearly 4% of deaths**.
Our research
In 2023 Royal London investigated the role trusts play in protection advice. Eight out of 10 advisers said they sometimes or always discuss trusts. While this would suggest that trusts are becoming more widely used, we aren’t seeing evidence of those conversations resulting in more trusts being written. Unfortunately, the trust gap, i.e., the number of eligible policies written in trust, is still wide with around only three in 10 customers actually having their advised protection policy written in trust***.
Mind the ‘trust’ gap!
In 2021, the UK saw just under 1.5 million new individual term assurance policies sold****. Swiss Re and Insuring Change estimated that only around 20% of all single own life term policies sold in 2022 were written in trust and even fewer non-advised.
The gap isn’t a new problem and sadly neither are the reasons advisers say they are put off discussing trusts, with complexity, jargon, time, client uncertainty and lack of understanding, a perception that they are only for the very wealthy, being common reasons I’ve heard.
A simple alternative
In recent years, our industry has improved the trust process from introducing online trusts to clearer wording on forms, but is that enough?
Discussing trusts as much as I do, I see these improvements are definitely helping, but more needs to be done to ensure good client outcomes. Some insurers are going further to give more options to advisers and clients. One solution is a contractual beneficiary nomination.
Contractual nomination allows the plan owner of an own life and own life or earlier critical illness contract to name individuals to receive any money paid from the policy on death of the life assured without needing to wait for probate or confirmation. Death benefits are also excluded from the estate of the plan owner and even though anyone named as a beneficiary at the time of claim has a contractual right to those death benefits, the plan owner is free to change their beneficiaries at any time.
When would you use a trust?
Contractual nomination of beneficiaries has been designed for more straightforward cases where clients know who they want to receive the benefits from their life policy on their death.
If clients have more complex situations, for example, requiring additional flexibility for estate planning including beneficiary protection, complex beneficiary choices or generation-skipping with loan backs or if they’re arranging the policy to cover an inheritance tax bill, they should still consider a trust.
Where a client wants to give away any terminal illness (or even critical illness) benefit, they should still use a trust that can do that, as contractual nomination would pay these benefits to the plan owner rather than the beneficiaries.
For joint life policies where, simultaneous deaths are a concern or where a client doesn’t wish to keep the benefits from a critical or terminal illness claim, trusts should also be considered.
Better outcomes
Nobody takes out a life assurance policy willingly knowing that the recipient of the money might have to wait weeks, if not months, before they get it, or that the policy could add to or create an inheritance tax problem, or, worst of all, the money could go to someone they didn’t want it to go to. These are bad client outcomes.
A trust solves these issues, but if a trust isn’t being put in place – for whatever reason – beneficiary nomination might just be the solution to support the right client outcomes.
*£3m sum assured, after spouse keeping £50k+ a third, kids get 65.6%
Source: Scottish intestacy rules: https://adviser.royallondon.com/globalassets/docs/protection/p9b0002.rules-of-intestacy-scotland.pdf
https://www.thegazette.co.uk/all-notices/content/103535
Succession (Scotland) Act 1964
***Life Claims, a beneficial direction / Ruth Gilbert (page 8)
****Swiss Re Term and Health Watch Report (2024). Page 8
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