Critical Illness Cover in Trust (IIP 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, you could name your children as the 'default beneficiaries' and your spouse as a 'potential beneficiary'.
You, as the policy owner, would give up any right to receive the policy proceeds in all circumstances, including in the event of your being diagnosed as having a critical illness.
Set up in this way, and in the event both parents die, the proceeds will go to your children free of any Inheritance Tax liability.
If you die but your spouse survives you, he or she can receive the death benefit, again with no liability to Inheritance Tax.
If you should not die, but have a critical illness, although you may not receive the proceeds, your spouse can and will then immediately be able to use the proceeds to (for example) pay off your mortgage.
By placing your life or earlier critical illness cover in trust in the above manner, it will also have the additional benefit, in the event you should suffer from a critical illness that prevented you from dealing with your own affairs, of allowing your spouse to receive the policy proceeds and use them to, for example, immediately pay off the mortgage.
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 – which simply 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.
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 should not survive you, your children would be able to receive the proceeds free of liability to Inheritance Tax.
