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The “Written in Trust” option means that in the event of a claim, the payout goes directly to the beneficiaries named on the policy, bypassing the taxman completely. From the above statistic, it would seem that life insurance companies are not bothering to advise customers on this, maybe because it makes no difference to the amount of money they pay out.

Because the life insurance policy is “Written in Trust”, any resulting payout will go direct to the beneficiaries, and is never counted as a portion of your legal estate. It is your estate that will be subject to inheritance tax, therefore the beneficiaries will receive an untaxed inheritance. The following example illustrates how it works:

Mr Smith wants to leave his estate to his two daughters, as his wife died a couple of years ago. He owns a home that is valued at £245,000, although he still has £10,000 to pay on the mortgage. His investments add up to £52,000, and his vehicle and other belongings another £18,000. Mr Smith also has a £100,000 life insurance policy which is not written in trust. We have estimated that the cost of administering the estate, organising probate etc would cost £5,000.

Mr Smith therefore has an estate which is currently valued at £400,000. If he died, that would be split equally between his daughters. However, the estate under £275,000 would be taxed at 25%, and the remaining estate of £125,000 would be taxed at 40%. That would mean £50,000 lost to tax, so each daughter would lose £25,000 of their £200,000 inheritance.

Now we work the figures out again, this time with a life insurance policy that has been written in trust. This time, the life insurance pays out directly to the daughters who each receive £50,000. The estate which is worth £300,000 is taxed at 25% for the first £275,000, and only £25,000 is taxed at 40%. The result is that the taxman only gets £10,000 at 40%, and the daughters get an extra £20,000 each.

Just by signing a few forms, Mr Smith could secure an extra £20,000 for each of his daughters. And signing those forms doesn't cost you anything. Whether you buy your insurance direct from a company or through a specialist broker, the forms are standard and they can easily submit the forms along with everything else. All you need to do is write down the names and details of your chosen beneficiaries – no solicitor is required or anything like that. The only person that will lose out in any way is the tax man – and they take enough of our money as it is!

It works the same if your life insurance policy is there just to pay off your mortgage. In that case, the money would be paid directly to your partner who would then use the money to privately pay off the mortgage. This helps avoid all the delays and legal procedures relating to the settling of an estate, and means that the money can go straight to where it is intended quickly, easily and without being taxed.

We've really studied the situation and have not been able to find any drawbacks or extra costs to having a life insurance policy written in trust. There is nothing to lose and everything to gain in this case – rare we know!

Don't forget to make sure that your Will is up to date, irrespective of what you decide to do about your life insurance policy.