Fewer than one in five new life insurance policies were written into trust arrangements in 2023 although momentum is building for alternatives such as beneficiary nomination, according to reinsurer Swiss Re and Insuring Change.
The latest Life claims: Balance of risks joint report released by the reinsurer and industry consultant show some small progress was made last year in increasing uptake of trusts by around 1.6% to 18.2%.
But Ron Wheatcroft, technical manager of Swiss Re and co-author warned: “There is still a long way to go for all life cover to reliably get funds in the hands it was meant for, and without unneeded delay.”
The figures also supported those published in Health & Protection’s Individual and Business Protection Report 2024 where from those insurers which shared their data barely one third of new life policies were put in trust.
It also found that where they were used alternative arrangements were proving popular ways to to secure payment directions with advisers and customers.
Modest improvement
The joint report presents the latest data showing the usage of trusts and beneficiary nomination with new pure protection level and decreasing term life policies.
The slight rise to 18.2% of all new term policies including joint life being put into trust, followed an increase of four percentage points in 2022.
That implies a maximum of 22.8% of single own life policies placed in trust in the same period, up from 21.1%.
Consequently, a minimum of 77.2% of single life term policies were still not written in trust – a modest improvement from 78.9% in 2022.
Last year’s report explored the risk of term life insurance policies resulting in delayed claims or, worse still, payment to someone other than the policyholder intended.
Wheatcroft (pictured) said there was still a long way to go for all life insurance payments to reliably reach those it is meant for and to do so without unnecessary delays.
He said: “With momentum showing signs of building for beneficiary nomination as an alternative to a trust, it is intended to collect actual numbers in both categories where possible in future.
“Indications from the insurers offering beneficiary nomination suggest that inclusion of the beneficiary nomination policies could have reduced the beneficiary gap to 68%, another nine percentage points worth of single life policies with direction of benefits.
“The percentage changes in single policies written in trust vary by product type with an improvement of 0.6 percentage points for new level term policies.
“Improvements for policies which include a critical illness benefit and where the policyholder is likely to intend the benefits to be paid to themselves on diagnosis of a critical illness were 3.5 percentage points with level term and 3.9 percentage points with decreasing term.”
Inheritance Tax planning
Wheatcroft added that the focus on Inheritance Tax in the UK could be a leading reason for not putting policies in trust.
“The report suggests that the legacy of focus on inheritance tax as the top reason for putting a life policy in trust could help explain why the majority of people might immediately think a trust isn’t important for them,“ he said.
“A reasonable conclusion which could be drawn from past Inheritance Tax data is that there is less than a 1% chance of a term life policy being part of a taxable estate.
“Even in the light of the changes announced in the Budget, this would change little, while speed of payment and [direction] to the intended beneficiary will remain the primary reasons for using a trust or beneficiary nomination.”
Wheatcroft also noted the long-term issue still comes back to reliably putting funds into the hands of those who it was meant for and without unnecessary delays.
“There is still a long way to go for all life cover to reliably get funds in the hands it was meant for, and without unneeded delay,“ he continued.
“It requires processes and communications across all parts of the distribution chain to be working together well to achieve this and it’s heartening to see the examples where this is being done already, indicating it can be done at scale.”