Critical Illness Cover in Trust (Discretionary Trust)
Depending upon family circumstances and your wishes, it is possible to place a policy that would pay out in the event of death or earlier critical illness in trust.
For example, if you are married with children, your spouse and children will all beneficiaries.
You, as the policy owner, would have to give up your right to receive any of the policy proceeds, including giving up your right to receive money from the policy in the event you have a critical illness.
If you should not die, but have a critical illness, although you may not receive the proceeds, your spouse can and would be able to use the proceeds to (for example) pay off the mortgage.
If you die but your spouse survives, he or she can receive the death benefit. If your spouse doesn't survive, your children can benefit, as they are also beneficiaries. Your policy is in a trust from which you have given up your right to benefit and for this reason, there will be no liability to Inheritance Tax on the payout. (Unless the policy has a value during the 24-hour period of a 10th anniversary.)
By placing your life or earlier critical illness cover in trust, there is an additional benefit. If you should suffer a critical illness that prevented you from dealing with your own affairs, your spouse would be able to receive the policy proceeds and use them to, for example, immediately pay off the mortgage.
Single Parent:
If you are single parent, you may consider using a split trust for a death or earlier critical illness policy.
Life of Another option:
An alternative to placing a life or earlier critical illness policy in trust as described above would be to set it up on a 'life of another' basis – this means that the insured person and the policy owner are not the same person. (Usually the policy owner would be the spouse or partner of the insured person.)
In the event of a claim on a policy set up on a life of another basis, the policy owner can, in the event of a claim, receive the proceeds quickly and with the minimum of 'fuss', whether the the insured person has died or had a critical illness. However, in the event of the policy owner not surviving the insured person, the policy proceeds would form part of the policy owner's estate and would therefore be potentially liable to Inheritance Tax, which means that your children could lose 40% of the payout.
It would therefore normally be preferable to set up your life or earlier critical illness cover in trust, as described above, so that if your spouse doesn't survive you, your children would be able to receive the proceeds free of liability to Inheritance Tax.
