The proceeds of a life insurance policy
are payable to the policy owner on the death of the life assured.
In case of a claim, it is important that the policy proceeds are available
as soon as possible. When a life assured dies, the assets of an estate
are effectively frozen and are therefore not available to beneficiaries
until probate is granted. This could take anywhere from 3 months to
3 years. In other words, an intended beneficiary may not receive any
income from a life policy set up for their benefit until probate is
granted. This problem can be overcome in the following ways:
- Assignments
- Nominations
- Trusts
Assignments
An assignment is a transfer of ownership from one person to another.
There are two types of assignment; an 'absolute assignment', where
ownership is transferred definitely; and an 'assignment by way of
a mortgage' or charge where ownership reverts to the assignor once
the loan is repaid.
If a protection policy is assigned absolutely, all the benefits
payable under the policy will be paid to the assignee. If the assignee
dies before any sum assured becomes payable, the policy proceeds
would be paid to the assignee's executors or administrators.
The benefits of assigning a life policy are as follows:
- Sale or exchange
- Gift or voluntary transfer
- Transfer to trustees or beneficiaries under the terms of a trust
- Transfer in connection with a mortgage with reassignment on
repayment
- A properly executed assignment will ensure that the assignee
has a valid claim to the policy proceeds on maturity or death.
Nominations
A policy owner may also nominate another person to whom the death
benefits shall be paid. A nomination does not transfer the ownership
of the policy or give the nominee any interest in the policy during
the lifetime of the nominator and may be revoked by the nominator
at any time.
The benefits of nominating a policy are as follows:
- The nominator is able to keep control of his policy and at the
same time ensure that at least part of the benefits will pass
to his chosen beneficiary or beneficiaries on his or her death.
- If the nominator's circumstances change he or she may revoke
or alter the nomination at any time.
- For endowment contracts, the nomination will operate in the
event of death before maturity, but when the policy matures the
benefits are payable directly to the nominator and not to the
nominee.
Trusts
There are many and various types of trust available but the use
of a simple trust can often help an individual's beneficiaries mitigate
tax liabilities. The legal definition of a trust is an "equitable
obligation binding the trustee(s) to deal with the property over
which he has control (called the trust property) for the benefit
of certain persons (called beneficiaries)".
The benefits of a trust are as follows:
- To give away the value of the trust property whilst keeping
control so that proceeds are not misused or wasted
- To protect the trust property against the settler's creditors,
although if the trust is created in an attempt to defraud creditors,
the courts are likely to overturn it
- To reduce the IHT liability by ensuring the trust fund forms
no part of the estate
- To control the time when beneficiaries will receive entitlement
to a share in the trust fund
A trustee holds the trust property in accordance with the trust
provisions and the law relating to trusts and acts independently
and without influence of the settlor or other trustees. Except in
special circumstances, a trustee is not to be paid for services,
although a reimbursement for expenses incurred in executing the
trust is permissible. Trustees may be individuals or companies.
One of the advantages of using a corporate trustee, for example
a bank trustee service or firm of solicitors, is that they are always
available and are willing to act on behalf of the trust.
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