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Why it’s vital to place a life insurance policy in trust for people in debt

I’m often surprised by the number of people who don’t have a life insurance policy. This is despite caring for a young family and repaying a mortgage.

However, with the bailiffs at the door, the credit card company on the phone and the payday lenders sending their daily text trying to reclaim their money, it’s easy to understand life insurance may not be the main priority.

It’s all too familiar to assist somebody in debt where they have no life insurance policy.

The thought of spending money on “something which may never happen” seems unnecessary, especially when debts have accrued to over £30,000.

Over 120,000 people enter an insolvency solution every year across the UK but life insurance is a valid monthly expenditure, even for people in debt.

The majority of people entering bankruptcy, an IVA (England, Wales and Northern Ireland) or a Trust Deed (Scotland) won’t have this insurance in place.

For those that do, it’s often the wrong life insurance policy because of the changes to their financial situation.

What Happens If Somebody Dies In A Debt Solution?

If a person enters an insolvency solution, their assets transfer to their insolvency practitioner. This typically means a house or car, however it can mean a windfall, bonus from work or money from a life insurance policy.

In the unlucky event when somebody dies during a debt solution and they have a life insurance policy, the insurance money is paid to the insolvency practitioner as an asset. This money is then used to repay debts and insolvency fees. If there is no money left then the family is responsible for the funeral costs.

The alternative option is to place the life insurance policy in trust. In the unfortunate event of somebody dying whilst in a debt solution, their life insurance money would be paid to the policy Trustee, not the insolvency practitioner.

That’s why it is vital to place a life insurance policy in trust for people in debt.

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  • Andrew Graveson 13th September 2013 at 3:14 pm

    Stuart makes excellent points and is to be commended for bringing this issue to the attention of financial advisers. We operate an online forum covering Scottish personal insolvency and frequently hear from members of the public that are confused and sometimes distressed upon discovering that their life insurance is no longer providing the cover that they believed it was. We covered many of the common issues associated with this topic in an article we published at http://www.trust-deed.co.uk/news/lifeinsuranceduringatrustdeedinscotland.php earlier this year. Advisers might want to take a particular interest in the devastating effect that a life insurance pay-out might have (in certain circumstances) upon a surviving joint homeowner if it were (apparently quite legitimately) used to repay the mortgage. Advisers also should be aware that a number of insolvency practitioners and debt advice intermediaries have joined forces with financial advisers to initiate the re-broking of life cover prior to a protected trust deed being signed (I’d assume the same will be the case with IVAs in the rest of the UK). If you’re not putting yourself in the position to assist your clients that are facing a formal insolvency in the future, by reviewing whether their life cover will remain suitable, it’s increasingly likely that someone else will step in and handle this instead.

  • Ian Smart 13th September 2013 at 12:58 pm

    This is good advice, but it is worth remembering that the policy should be put in trust as soon as it is taken out. Waiting until you’re already in financial difficulty can leave the trust open to attack and it could be set aside with benefits still being used for the benefit of creditors