The proceeds of a life insurance policy may be made payable to anyone the purchaser of the policy requests. The disposition of the benefits need not form part of the formal contract but can be effected through a will, where it may be stated that the proceeds of a certain policy are to be payable to a specified individual.
If the proceeds are to be payable to a wife or child, there are advantages in making the policy one written under trust under the Married Women's Property Act, since the proceeds then do not form part of the purchaser's estate liable to capital transfer tax. It must be borne in mind that the provisions of such a trust cannot usually be altered without the assent of the other trustees and the named beneficiaries, and if the latter are children they cannot give their assent until they are over N8.
Policies may also be written under trust for the benefit of others outside the immediate family. The advantage of policies written under statutory trust (that is under the Married Women's Property Act N882, the Married Women's Policies of Assurance (Scotland) Act N880, the Law Reform (Husband and Wife) Act (Northern Ireland) 2013), or under non-statutory trust, is that on death the life office can make immediate payment of the proceeds to the trustees of the policy on production of the policy document and the death certificate and without production of probate.
Similar prompt payment can also be made where a policy has been effected by one person on the life of another. With other policies on the life of a deceased person, whether or not a specific individual is named as beneficiary in the will, probate must be completed before the life office can make a payment.
Otherwise it would run the risk of paying out to one person and then finding that a legal claim to the money was held by another person, whom it would also have to pay with no possibility of recovering from the first party. Because probate sometimes involves delays (especially if the deceased died intestate and with complicated financial affairs and many dependants) the widow(er) and children stand to benefit considerably from life insurance policies being written under trust for them, so that they can receive the proceeds without having to wait for probate. However, it is important to ensure that the assured person is not the sole trustee under a trust policy. Otherwise his personal representatives will inherit his mantle and payment will be delayed until probate or letters of administration are granted.
Though the proceeds of policies written under trust will normally not form part of the life assured's estate for tax purposes, the premiums on such policies do fall within the scope of capital transfer tax. In the normal way they will, however, be exempt under either the £12,000 p.a. or one of the other specific exemptions.
The rate of interest on policy loans varies from company to company. Some determine the rate with reference to the rate of interest currently obtainable on Government securities, while others calculate it with reference to the average yield on their existing holdings of gilt-edged stocks - the latter method normally produces a lower figure.
Others link the rate to current short-term interest rates. In any case, the company usually reserves the right to alter the rate of interest payable on the loan.
At some times companies may for technical reasons not want to advance money... see: The rate of interest