I am going to start this by making my position very clear. The question of how best to direct life assurance policy proceeds – whether through beneficiary nomination or trusts, is not, in my view at least, the question.
This is because no one has ever argued that beneficiary nominations is better advice or delivers better outcomes for clients than a trust.
Beneficiary nomination advocates’ sole rationale is predicated on the lack of the use of trusts and therefore the need to offer advisers a simpler solution.
In order words policies are not going into trust because trusts are complex, so we need to dumb it down to encourage take up.
I am not convinced, and I am not alone.
While I accept the concept that if you keep doing the same thing you should not expect a different result, this does not justify offering a poorer solution.
Trying to be as unbiased as possible, I want to explore the take-up of each approach, weigh up their advantages and disadvantages and address the critical issue that is always overlooked – the practical challenges for and impact on financial advisers.
Take-up comparisons
In 2023, Swiss Re reported that only 18.2% of new term life insurance policies were written in trust, although a marginal increase from prior years the rate of increase in the use of trusts appears to be slowing.
Whether this represents a persistent reluctance among policyholders, advisers or a combination of to embrace this option is unclear.
The use of beneficiary nomination lacks precise public statistics. However, its use appears significantly lower, likely a fraction of the non-trust majority (over 80%), although this is almost certainly due to it being offered by fewer providers and being less understood.
Beneficiary Nomination
Advantages:
- Simplicity: Nomination requires minimal setup, just naming a beneficiary at policy outset, avoiding the legal documentation of trusts.
- Speed: Proceeds bypass probate, reaching beneficiaries quickly.
- Inheritance Tax (IHT) efficiency: Pay outs stay outside the estate, assuming no retained benefit.
- Flexibility: Despite some, which does not include me, questioning whether policyholders can retain the right to change nominees without negative IHT implications, this flexibility does exist. Changing nominees does not trigger a taxable event as no value transfers during life, and HMRC accepts this provided the policyholder is not a beneficiary.
Disadvantages:
- Limited control: Nomination offers no conditions on access to proceeds.
- Inflexibility in scope: Changes are possible but only where insurers allow, some lock nominees at inception, and it’s less adaptable than discretionary trusts.
- Availability: Not all insurers offer it.
- Vulnerability: Proceeds go directly to nominees, unprotected if they’re minors or incapacitated.
- Terminal illness: Proceeds may go to nominee unlike a trust where terminal illness can be carved out
- Limited tax planning: While IHT is avoided, nomination lacks the strategic depth of trusts for broader estate planning.
Trusts
Advantages:
- Control: Trustees can manage funds per the policyholder’s terms (for example, delaying distribution until beneficiaries are 25).
- Flexibility: Discretionary trusts allow ongoing beneficiary adjustments, ideal for evolving family needs.
- Protection: Assets are safeguarded for vulnerable beneficiaries.
- Tax planning: Trusts enable sophisticated IHT strategies, like generational wealth transfer, beyond simple exemption.
- Universality: Available across all insurers, digital, no cost and a standardised option advisers know well.
Disadvantages:
- Complexity: Setting up a trust involves legal steps, trustee appointments, and trustees have ongoing duties
- Potential IHT charges: Discretionary trusts may face periodic 6% IHT charges every 10 years if the estate exceeds the nil-rate band – this is £325,000 in 2025.
- Inflexibility in absolute trusts: Once set, beneficiaries can’t be changed.
Practical issues for advisers
Introducing beneficiary nomination as an alternative to trusts poses practical hurdles for advisers already grappling with trust adoption.
Trusts, while complex, are a known entity – advisers understand their setup, albeit imperfectly given the 18.2% uptake, and can lean on insurer support or legal templates.
Nomination, however, is less familiar:
- Learning curve: Advisers must master a new process, varying by insurer, when many struggle with trust basics like trustee roles or tax reporting.
- Distributor process: Integration of support teams, compliance process changes and the incorporated of both into business submission.
- Client explanation: Explaining nomination’s simplicity risks overselling it, while its limits may confuse clients expecting trust-like features.
- Provider variability: Inconsistent availability forces advisers to tailor advice per insurer, complicating workflows compared to trusts’ uniformity.
- Risk of mis-advice: Without deep understanding, advisers might overlook nomination’s pitfalls (such as terminal illness pay outs entering the estate), increasing liability. The nominee pre-deceasing the policyholder putting in question the ownership of the proceeds without further action prior to a claim.
For many advisers, trusts’ complexity appears to be a hurdle, but it’s a hurdle they’ve been trained to clear. Even if not enough are embracing them.
Although we should also not forget policyholder reluctance. Nomination demands they pivot to a different mindset – simpler yet less robust.
If advisers’ inertia stems from complexity I would question how does offering a further technically different option solve their discomfort.
Papering over the real issue
Beneficiary nomination for non-advised sales I can see real value in but as a panacea for the low uptake of advised life policies in trust is flawed.
Yes, it is simpler and avoids both probate delays and IHT but it’s an inferior solution in scope and utility. Trusts despite their relative complexity offer unmatched control, protection, and tax planning.
Nomination’s appeal hinges on sidestepping adviser inertia, not surpassing trusts’ benefits.
The real issue – advisers’ reluctance to engage with trusts – won’t be solved by a lesser tool; it requires tackling that inertia head-on through education and support.
Pushing nomination as the answer risks papering over a deeper problem with a thinner fix, leaving policyholders underserved where trusts would better fit.