Should I put life insurance policy in trust?

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I’ve moved this from money matters which doesn’t get much traffic in the hope that someone might have been in the same position and have some advice for me.

I am in the situation where, having paid off the mortgage on the family home a couple of years ago, I have taken out another (interest-only) mortgage to buy my ex out of his share of the property which we own as tenants in common. The mortgage term is 11 years but the plan is to downsize after 5 years or so and repay the capital. I was intending to sell and downsize now as DC are adults but both are still studying and living at home, one is at uni for a few more years and one doing a further qualification which should lead to a good job in around 18 months and both really wanted me to hang onto the house for a bit longer if possible.

I have taken out a life insurance policy (also 11 years term) for the mortgage capital but am unsure whether I should put it in trust for the DC. My understanding is that if I don’t put it in trust then if I were to become terminally ill I could claim and pay off the mortgage which would be a huge relief in that situation. However, if I were to die suddenly the insurance payout would become part of my estate and push it over the IHT threshold by £400-£500K (assuming London property prices remain stable and as a single person I can only pass £500K of property onto DC). If the insurance policy were in trust then the estate would only be £100-£200K over the IHT threshold which would be better for the DC.

Is one option clearly better here or do I need financial advice (IFA or tax specialist)? If it makes any difference I already have a life insurance policy taken out a few years ago (£400K) in trust for the DC but this ends in 6 years when I turn 65. I don’t have any health problems currently so expect to be able to follow my plan of downsizing around the age of 65 and repaying the mortgage capital so maybe it would be better to put the life insurance policy in trust for the DC at that point or even cancel it? Does anyone have any thoughts on what best to do?

TL;DR: I have recently bought my ex out of the family home by taking out a new interest-only mortgage as I approach retirement with the plan to repay the capital by downsizing in about 5 years. I have taken out a life insurance policy to cover this sum but am unsure whether to put it in trust or not. Case for putting in trust: protect my estate against IHT; case against: inability to claim and pay off mortgage in terminal illness.

"Is one option clearly better here or do I need financial advice (IFA or tax specialist)?"

I think that this is a question that nobody here can really answer.

"My understanding is that if I don’t put it in trust then if I were to become terminally ill I could claim and pay off the mortgage which would be a huge relief in that situation."

Another possibility may be to take out some sort of separate critical illness cover until you downsize. Critical illness covers a wider range of things but can be expensive though.

Perhaps compare the cost of critical illness with having a small separate life insurance policy with terminal illness benefit not written in trust. This would be just large enough to cover your mortgage payments and other living costs.

This would not be designed to pay off the mortgage, just to cover the payments and your other living costs. You then keep the life insurance policy designed to pay off the mortgage in trust for when you do pass away.

But this is something that you need professional advice on.

Surely if you have an interest only mortgage and an insurance policy equivalent in value to the mortgage, then should you die, the policy will have to be used to pay off the mortgage? Only then will the estate be valued for IHT purposes.
Your DC could end up in a tricky position of having to sell the house in order to pay off any IHT.
How much is your house worth and how big is your mortgage? Also, I assume the house is now solely in your name?

"...then should you die, the policy will have to be used to pay off the mortgage?"

Not necessarily. The beneficiaries of the will (presumably the DC) could choose to sell the house.

The life insurance policy passes to them directly, outside of the estate, so isn't counted for IHT.

They can then choose to use the payout from the insurance policy to pay off the mortgage or they can choose to sell the house or they can choose to take out a mortgage in their own name.

Thanks very much for your responses. Thinking about the suggestion of critical illness cover, I'd nearly forgotten I also have income protection insurance; looking into the terms it seems even if I downsized from my current job and my earnings decreased the guaranteed minimum monthly payment would cover my mortgage payments plus a bit extra.

So it's looking like I should put the life insurance policy into trust. Could a solicitor who does wills advise on what type of trust would be most suitable or do I need a specialist?

I put my life assurance policy in Trust a few years ago. I can't specifically remember the reason why, but I think it was because my DC are so young, and I'd specified a % share to them individually, a trusted friend would assist my DP to manage their money and he couldn't just spend it on wine, women and weed (potentially).
I wrote a "letter of wishes" to accompany my Will suggesting to the Trustees what I'd like the money to be used for ie: driving lessons, music tuition fees or hobbies, holidays to places I'd enjoyed visiting - that kind of thing. It's obviously non-binding.
It also removes the money from "my estate" so it's easier to distribute.

A friend died of cancer last week aged 44, so I would encourage everyone to consider their future financial affairs.

"So it's looking like I should put the life insurance policy into trust. Could a solicitor who does wills advise on what type of trust would be most suitable or do I need a specialist?"

There was a section on my Life Assurance companies website where I could apply to put it in Trust. The Trustees had to agree and sign a form so there is a bit of paperwork but fairly easy to complete.

I believe that once it's in Trust, you can't revert back.

Apologies - reading again your DC are adults so I'd look again at whether a Trust is the right thing for you. They don't need a Trustee to manage the money on their behalf.
Check again that money outwith a Trust forms part of your Estate. It's not money you have in your lifetime (IE like savings). It's money paid out on your death.

IINAL. Just my view.

I've just checked our old policies..set up with an IFS.

All our non-mortgage related life policies are/have been put in trust. These are the lump sum one(s) not intending to pay off the mortgage. In trust so stay out of the estate for IHT but more importantly it means they will be paid immediately and you do not need to wait foprovable etc.

The ones we had for mortgages (decreasing term ones) were not put in trust. No idea if specifically linked to the mortgage.

So not sure if this helps. (Happy to recommend our IFA if you're in the south east and need one).

I wish my parents had put their life insurance policies in trust for me and my brother. We have a huge IHT bill on their fairly modest semi in a London suburb and trying to extract funds from policies to pay it is proving very hard. You can't get probate and access the funds (or sell the house) without paying the IHT first, but we can't pay the IHT without the funds. I actually don't have a problem with paying the IHT, but I wish it could be made simpler. I am losing work hours because of all the admin I am doing.

If they'd put the policies into trust the funds would have been available far more easily. As it is, I spend hours every day chasing up forms, getting things counter-signed.

Either speak to your insurance provider (they are used to dealing with these sorts of issues) or a solicitor who is a Trust & Estate Practitioner will provide independent advice

https://www.step.org/about-step/public

or here

https://advisingfamilies.org/uk/

Thanks so much everyone. I am definitely going to put the policy in trust now, not needing to wait for probate if in trust wasn’t something I was aware of and that would definitely make it easier for DC if they needed to claim. They could be in a similar situation to @Abra1t, unable to pay IHT without access to funds from the estate.

Seek the help of an alternative lender to help you. There's a few for iht repayments.

I'm a mortgage broker. Seek advice.

Depending on who you're insured with, the trust can be set up for you to retain terminal illness benefit.

However, terminal illness is hard to claim on with most policies because getting a medical professional to put in writing your expiry date is tough, usually it's a 12 months or less time frame.

From my knowledge there's one policy that pays out on terminal
Illness as soon as you have a terminal diagnosis. Therefore make sure you have the right policy for your concerns.

Did you work with an adviser to organise this policy?

Save yourself the bother & not take out any life insurance. You already have a policy tired £400k in trust to your kids. If you die during the next 6 years they can use that. At that time you said you are downsizing anyway, so that will release money to pay off the mortgage.

And how big is this IO mortgage? You mention that your Estate is already in excess of the Nil Rate Band by at least £100k so your kids are going to have a pretty penny already when you die.

Your insurance company will have specific forms to use for all types of trust