Life Insurance and Probate: Does a Policy Go Through the Estate?

Life insurance is often one of the most valuable assets connected to an estate, but whether it forms part of the estate for probate and inheritance tax purposes depends on a single question: was the policy written in trust? The answer to that question determines whether beneficiaries receive the money quickly and free of IHT, or whether they must wait for probate and potentially pay 40% tax on the proceeds.

Many people never complete a trust deed when they take out a life insurance policy, leaving the proceeds to flow through the estate when they could have been ring-fenced for beneficiaries instead.

Policies written in trust

When a life insurance policy is written in trust, the policyholder assigns the policy to trustees (often the same people as the beneficiaries, or a professional trustee) for the benefit of named beneficiaries. The trust is a legal arrangement that separates the policy from the policyholder's estate.

The consequences when the policyholder dies are significant:

• The proceeds are paid directly to the trustees for the named beneficiaries, without passing through the estate
• No Grant of Probate is required before the insurer pays out
• The proceeds do not form part of the estate for IHT purposes and are not taxed at 40%
• Beneficiaries typically receive the money within weeks of the claim being settled, not months

This is the recommended approach for most life insurance policies, particularly term life and whole-of-life policies intended to benefit a surviving spouse, children, or other family members.

Policies not written in trust

If a policy was taken out in the policyholder's own name and no trust deed was completed, the death benefit forms part of the estate in the same way as any other asset. The consequences are:

• The proceeds cannot be paid until probate is granted, which can take many months
• The value of the policy is included in the estate for IHT purposes: if the estate is above the nil-rate band threshold, 40% of the proceeds may be paid to HMRC as inheritance tax
• The proceeds are distributed according to the will or the intestacy rules, not necessarily to the people the policyholder intended

A large proportion of policies in existence are not written in trust, often simply because the policyholder was never advised to complete a trust deed, or because they intended to do it later and never got around to it.

How to find out if a policy is in trust

As executor, finding all life insurance policies and establishing their trust status is an early priority. Here is where to look:

• Policy documents: look for a "deed of assignment" or "trust deed" alongside the main policy document. If a trust exists, there will be a separate document naming the trustees and beneficiaries.
• Contact the insurer directly: provide the death certificate and the policy number. The insurer will confirm whether the policy is held on trust and, if so, who the trustees are.
• Bank statements and direct debits: these can help identify premiums being paid to insurers who may not have been contacted yet.
• The deceased's paperwork: policies should be in a files folder, safe, or with a solicitor.

If there is any doubt, contact the insurer. They hold the original policy and trust information and are the authoritative source.

Death-in-service benefits from an employer

Many employers provide a death-in-service benefit, typically paying a multiple of the employee's salary (commonly two to four times) to dependants on death. These benefits are almost always held in trust through an occupational pension scheme or a separate employee benefit trust.

Because they are held in trust, death-in-service benefits do not form part of the estate and are not subject to IHT. They are also not included in probate. The trustees of the scheme have discretion to pay the benefit to whomever they consider appropriate, which is why it is important to complete a "nomination of beneficiaries" or "expression of wishes" form and keep it up to date. The trustees are not legally bound by the nomination, but they give it serious weight.

To claim a death-in-service benefit, the executor or family should contact the deceased's employer's HR department as soon as possible after the death. The employer will provide details of the scheme trustees and the claim process.

Mortgage protection insurance

Mortgage protection policies (designed to pay off the mortgage on death) are often arranged as joint life policies or written in trust for the benefit of the surviving joint owner. In either case, the payout is usually not subject to probate.

However, this is not universal. Some policies are still held in the policyholder's sole name without a trust. If the deceased had a mortgage protection policy, check with the insurer to confirm the arrangement and whether the mortgage lender should be notified directly.

Joint life policies

A joint life policy insures two lives and pays out on the first death. The survivor becomes the sole beneficiary of the payout. Provided the policy has been correctly set up, the proceeds pass to the survivor without forming part of the deceased's estate. The practical effect is similar to survivorship: the money goes to the survivor automatically.

If the joint life policy was written in trust naming the survivor as sole beneficiary, this is confirmed by the trust documentation. If it was not written in trust, the survivor may still receive the proceeds as the joint policyholder, but the IHT position should be checked with an adviser.

Critical illness policies

Critical illness insurance pays a lump sum on diagnosis of a specified serious illness. If the policy paid out before the policyholder died, the proceeds will have entered their estate and will be included in the IHT and probate valuation as cash or investments. A critical illness policy that had not paid out at the time of death has no value for the estate (the insured event has not occurred and cannot now occur).

IHT implications

What executors should do

When administering an estate that includes life insurance policies, follow these steps:

• Locate all policies among the deceased's paperwork and review bank statements for premium payments to unidentified insurers
• For each policy, contact the insurer to establish trust status and request a claim form
• For policies written in trust, notify the trustees and the insurer, providing the death certificate; the trustees will handle the claim and distribution to beneficiaries separately from the estate administration
• For policies not written in trust, include the policy value in the estate valuation for both probate and IHT purposes; the insurer will require the Grant of Probate before paying out
• Contact the deceased's employer about any death-in-service or group life benefits and assist the family in submitting the relevant forms

Related guides

• Inheritance tax explained
• Nil-rate band and residence nil-rate band
• Deed of variation: redirecting an inheritance
• Executor duties explained