MoneySuperMarket has highlighted a persistent gap in consumer understanding that has significant implications for advisers, as many families remain unaware that life insurance payouts may be subject to Inheritance Tax (IHT) unless the policy is written into trust.
New research from MoneySuperMarket revealed that one in five people (21%) do not realise their life insurance proceeds could form part of their estate for Inheritance Tax purposes if not held in trust.
In practice, this risks reducing the intended benefit to dependants, with Inheritance Tax charged at 40% above the nil-rate threshold.
For advisers, the findings reinforce the importance of routinely assessing trust arrangements as part of protection reviews, particularly for clients with growing estates, young families or complex circumstances.
The research also underlined the opportunity for advisers to highlight the administrative advantages of trusts, which can deliver faster access to funds by bypassing probate.
In contrast, assets tied up in probate can delay support for months or even more than a year.
Kara Gammell, life insurance expert at MoneySuperMarket, said: “Putting your life insurance policy in trust can make a big difference for your loved ones. It means the payout usually bypasses probate, so your family can access the money faster at a time when they may really need it.
“Not only can it help reduce inheritance tax, but it also gives you greater control over who receives the money and when. This is particularly useful if you have young children or dependents who may not be ready to manage a lump sum.
“The good news? Setting up a trust is quicker and easier than most people think – and many providers offer this service for free. It’s a simple step that can make a huge difference in protecting your family’s financial future.”
