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Life insurance is one of the most misunderstood assets in estate administration. Many families assume that a life insurance payout will automatically go to the named next of kin, bypassing probate and Inheritance Tax. In reality, whether a policy forms part of the estate depends entirely on one question: was the policy written in trust? This guide explains the distinction, the IHT consequences, how to find out the answer for a specific policy, and how to claim a payout in either scenario. For a broader overview of which assets go through probate, see our guide to what counts as an asset for probate.
When a life insurance policy is "written in trust," the policyholder has placed the policy into a legal trust during their lifetime. The trust holds the policy on behalf of named beneficiaries. When the policyholder dies, the insurer pays the death benefit directly to the trust, which then distributes it to the beneficiaries — without going through the deceased's estate at all.
When a policy is not written in trust, the policy proceeds form part of the deceased's estate. The insurer pays the money to the executor (once probate is granted), who then distributes it according to the will or the intestacy rules — just like any other estate asset.
The practical consequences are significant:
| Factor | Policy in trust | Policy not in trust |
|---|---|---|
| Part of probate estate? | No | Yes |
| In the deceased's estate for IHT? | No — but the trust can have its own IHT position | Potentially yes |
| Requires a grant before payout? | No | Usually, for larger amounts — each insurer sets its own limit |
| Who receives the payout? | Trust beneficiaries directly | Executor, then estate |
| How quickly is it paid? | As soon as the insurer has the trustees' claim — no grant needed | After the grant is issued |
If the policy was not written in trust, the death benefit is a debt owed to the estate. The insurer will typically require either:
Once collected, the proceeds form part of the residuary estate. They are distributed according to the will (or intestacy rules if there is no will), after paying any debts, funeral costs, and IHT. The IHT impact can be substantial: a £200,000 policy payout added to an estate already above the nil-rate band (£325,000) will attract IHT at 40% on the policy proceeds — an £80,000 tax cost that could have been entirely avoided by writing the policy in trust.
For the probate process generally, see our guide to applying for probate.
If the policy was written in trust, the claim is made by the trustees (often the same person as the policyholder's partner, or named trustees), not the executor. The process is:
Because no grant is needed, this route is normally much faster than waiting for a grant. Neither the insurers nor any official source publish a standard timescale, so this guide does not estimate one — ask the insurer what it expects once it has the completed claim. The speed is one of the practical advantages of writing a policy in trust, particularly if the family needs funds quickly to cover funeral costs or living expenses.
Many policyholders set up a trust years before their death and the family may not know whether this was done. To find out:
The most common type — pays a lump sum if the insured dies within the policy term. If not in trust, the lump sum forms part of the estate. If in trust, it bypasses the estate entirely. Term policies are typically straightforward to write in trust at the time of taking them out — most insurers offer a simple online trust form.
Pays out whenever the insured dies (not within a specific term). Often taken out specifically for IHT planning, with the proceeds intended to pay the IHT bill. If written in trust (and it almost always should be for this purpose), the trustees receive the payout and use it to pay the IHT on behalf of the estate — a common and effective planning strategy. If not in trust, the whole of life payout ironically increases the IHT estate.
An older type of policy that pays out either on death or at the end of the policy term (whichever comes first). If the policy has not yet matured (i.e. the deceased died before the end of the term), the death benefit is treated the same way as term life — in trust or out of trust has the same consequences. If the policy had already matured and the proceeds were sitting in a bank account, they form part of the estate as cash.
Employer-provided group life (death-in-service) benefits are typically held in a discretionary trust by the employer. The trustees (usually the employer or a specialist pension trustee) have discretion to pay the benefit to whoever they consider appropriate — usually the deceased's dependants or nominated beneficiaries. Because the benefit is held in trust, it:
Employees can complete a "nomination of beneficiary" form with their employer to indicate who they would like the trustees to consider. In an employer's discretionary group life trust that nomination is not binding — the trustees take it into account and then decide. That is not a universal rule for pensions: in the statutory public service schemes the benefit is paid under scheme regulations and a valid nomination can bind the scheme, so check which kind of scheme you are dealing with. Keeping nomination forms up to date (particularly after divorce, remarriage, or the birth of children) is important.
If the insurer paid the death benefit directly to a family member (rather than to the executor) and the policy was not in trust, this creates a problem: the money legally belongs to the estate and should have been collected by the executor. The family member who received it holds it on behalf of the estate and is technically obliged to hand it to the executor for distribution through the estate.
In practice, this often happens where a family member was named as "next of kin" on the policy, or where the insurer paid without requiring probate. If you are the executor and discover this has occurred, you should:
A policy can only be written in trust by the policyholder during their lifetime. Once the policyholder has died, it is too late — the trust could not validly be created after death, and any attempt to do so would have no legal effect. The insurer will not accept a retrospective trust.
A deed of variation cannot put the policy into trust retrospectively either. What it can do is redirect who inherits from the estate — for example to a surviving spouse or a charity, where an exemption then applies — and it must be made within two years of the death and signed by everyone who loses out. For information on deeds of variation, see our guide on the complete UK probate guide.
If the policy is not in trust, the death benefit is added to the rest of the estate for IHT purposes. The IHT calculation is straightforward: the policy proceeds are part of the taxable estate, and IHT is charged at 40% on the portion above the available nil-rate band — £325,000, or up to £500,000 where the residence nil-rate band of £175,000 is also available because a home passes to direct descendants. Both figures are frozen: the nil-rate band to 5 April 2031 and the residence nil-rate band to 5 April 2030.
Example: An estate of £280,000 (excluding the life policy) with a £150,000 non-trust life policy. Total IHT estate: £430,000. If the nil-rate band is £325,000 (no RNRB applicable), IHT is due on £105,000 at 40% = £42,000. Had the policy been written in trust, the estate would have been below the nil-rate band and no IHT would have been payable.
For more on IHT calculation, see our guide to inheritance tax basics.
If the policy is not in trust and forms part of the estate:
For the IHT400 form guide, see our IHT400 guide.
If the policy is in trust, yes — the trustees can claim directly without a grant. If the policy is not in trust, many insurers will pay without a grant for amounts below their own threshold, but larger amounts usually require the grant first. There is no industry-wide threshold and no official source publishes one: each insurer sets and publishes its own, so ask.
Without a nomination form, the employer's pension trustees use their discretion to decide who should receive the benefit — typically the spouse, civil partner, or dependants. The trustees will usually contact known family members and ask them to complete a form confirming family circumstances. The benefit is still paid directly to the chosen individual(s), bypassing the estate.
For policies in trust: no, the trust pays out a lump sum. For policies not in trust, any income earned between the date of death and the date the policy is collected may need to be declared as estate income in the estate's self-assessment return (SA900). This is unusual for term policies but may arise for investment bonds.
If you know a policy exists but cannot locate the documents, contact the insurer directly if you know who they are. If you do not, work back from the deceased's bank and card statements: a life policy is paid for by regular premiums, and the payee name on the statement identifies the insurer. Old correspondence, an employer's HR department (for group cover) and any solicitor who held papers in safe custody are the other places policies turn up. There is no single official register of life policies to search.
A joint life first-death policy pays out on the first death and the policy then ends. Where it goes depends on how the policy is owned and written, which is set out in the policy schedule — commonly the proceeds are payable to the surviving policyholder rather than into the deceased's estate. Ask the insurer to confirm the position on the specific policy before assuming either way. Where a spouse or civil partner does receive the proceeds, the spouse exemption means no inheritance tax is due at that point; the proceeds then sit in the survivor's own estate and count for inheritance tax when they die.