Trusts may have a place in the estate planning of the rich but not in the lives of most consumers. Unless they try to insure their lives through responsible advisers, in which case we talk about them and they get confused. Statistics from a large and well-intentioned whole-of-market protection intermediary bear this out: it sends out about 2,000 trust forms with extensive completion guidance each month. Three hundred policyholders call each month to discuss these but only around 150 of the forms are ever returned. Of these, 30 have errors fatal to their purpose. In the end, despite perhaps £150,000 of annual cost, only 7 per cent of policies ever make it into trust.
How can we reduce this ridiculous waste? Let’s go back to basics. The aim of putting a policy in trust is threefold: increasing the speed of payment, ensuring the monies go to the right people and avoiding inheritance tax. However, the last is not a need for most claimants. Research from reinsurer RGA reveals that 57 per cent of life claims are for less than £100,000, which implies wealth of far less than the IHT threshold, as does having a mortgage rather than a vast estate. After the next budget IHT is likely to be an issue for even fewer of them. But it was for those very few that the trusts were developed and we need to help the many. How else could the modern protection market focus on the first two of those three purposes?
The answer could be through something several insurers have been quietly doing for years. They simply ask the person making a claim to identify the primary beneficiary and then they pay out a reasonable sum on an indemnified basis as soon as the claim is admitted. This means things such as funeral and household bills can be paid in the interim and families avoid the issues caused by probate delays. Job done for the vast majority and certainly better done than a trust they never settled. One of these insurers told us it has been doing this for years, with thousands of polices, and that in that time just two payouts were disputed and only one had to be paid again. It has saved vast administrative costs in return. If all insurers adopt this process and, importantly, make advisers and consumers aware of it, then responsible advisers can offer effective trust advice to the high net worth few and the whole market can serve all its clients better by not confounding them with legal paperwork because they know the insurer will do the right thing.
You might think that is a nicely convenient argument but as we all strive to simplify our processes so as to appeal more to consumers who loathe paperwork and legalese, and love simple speedy solutions that work, marketing this one and boasting of quick payments would be a very attractive message. It would also mitigate the shamefully long wait claimants currently face.
Tom Baigrie is chief executive of LifeSearch
This article courtesy of Money Marketing, first published 29/5/15