Life Insurance During A Trust Deed In Scotland
12th March 2013
In this article we review how life insurance policies can be seriously affected by entering a protected trust deed. In some circumstances, your family might not be paid if you die. We also review whether it can be worthwhile to take out certain new and very specific life insurance policies in advance of proceeding with trust deeds in Scotland.
This article does not constitute insurance advice. We suggest that you liaise with your (prospective) trust deed provider and a trusted IFA (Independent Financial Adviser) of your choice prior to making any final decisions about life insurance (which should be completed before you sign a trust deed).
Life Insurance Policies After Signing A Trust Deed
Much depends upon how an existing life insurance policy is written. In many circumstances the benefits of an existing policy are highly likely to “vest” in your trustee if you were to pass away during your trust deed. The effect of this might be that the trustee will take control of any life insurance policy pay-out rather than it passing directly to the intended beneficiaries (who typically will be your financial dependents).
The money paid in the event of a claim might be used to repay your creditors, interest on the debts, and the protected trust deed fees, prior to any remaining balance being paid to your intended beneficiaries.
To confirm the position you’ll need to clarify the issue with your trustee prior to signing your trust deed. You may wish to get written clarification of their answer. If you find that any payment would initially vest in your trustee you may wish to review your current life insurance arrangements.
This review should be done with an Independent Financial Adviser that you have reason to trust. Make them aware that you’ll be signing a Scottish trust deed and ask them if they can recommend a solution that would result in the outcome for your beneficiaries that you desire.
Taking Out Life Insurance If You Don’t Currently Have Any
Life insurance, with a reasonable monthly premium, is typically considered to be an acceptable area of expenditure during a protected trust deed. If you don’t currently have a policy (before you sign your trust deed) you may wish to consider how anyone that is financially dependent upon you would cope if you were to pass away (or become seriously unwell).
Be conscious of the amount of any life insurance premium that you commit to. It will reduce the amount that is available to pay to your trust deed each month, which might lead to the prospective trust deed term having to be extended (or possibly even to make the option unavailable to you).
You’ll therefore want to co-ordinate any decisions you make between advice from a trusted IFA and your potential trustee. As mentioned previously, you’ll want to ensure that any new policy is written in a way that your beneficiaries will benefit as you expect if the worst were to happen.
Life Insurance For Joint Homeowners
Some people take out life insurance policies that will result in their mortgage being fully repaid if they die. However, if you’re in a protected trust deed this will effectively create an asset (a mortgage-free home) that your trustee is likely to be obligated to use to repay your creditors. This might have to be accomplished by the sale of your home.
To avoid this risk take advice from an Independent Financial Adviser before your trust deed begins. Make sure they’re fully aware of the circumstances, including the prospect of entering a Scottish trust deed.
Will Life Insurance Make It More Likely That Your Creditors Will Accept Your Trust Deed?
Almost certainly it will not. If you are given this information please take it with a massive pinch of salt. Our experts provide some information on this topic in this forum thread.
The sale of life insurance policies is very lucrative for the company making the sale. They may receive around twenty times your monthly premium as a commission for the sale. A £50 per month life insurance policy might generate them a commission of around £1000 for example.
It will also reduce your disposable income by £50, meaning that your creditors stand to receive less from your trust deed. This may affect their willingness to accept your trust deed or may result in a longer trust deed term being required.
However, you may still be well-advised to have a life insurance policy to protect those that depend financially upon you. Remember that you can use any firm of your choice to obtain a life insurance policy, and that you don’t have to use a firm that is recommended to you by your trustee (or any other interested party). Make sure that the IFA you choose is aware of the prospect that you will sign a trust deed soon and that they are knowledgeable enough to understand the implications of this.
Have you got a question about Scottish trust deeds and life insurance? You may wish to ask the Trust-Deed.co.uk panel of experts in our forum. You can register to use the forum (anonymously if you wish) here.
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