According to the National Wills Report in 2023, only 44 percent of adults in the UK have made a Will. Direct Line has reported that only 35 percent of people have life insurance cover, despite six in ten households agreeing that it would benefit their family. Both Wills and life insurance are, for many, essential estate planning tools and, if arranged correctly, can bring a host of benefits to them and their loved ones.
Life insurance can be defined as a contract between an insurance company and the policy holder where, in exchange for premium payments, the insurer promises to pay a sum of money to designated beneficiaries on the death of the policy holder. Such policies can offer numerous advantages, including a sum of money to pay immediate expenses and outstanding debts after the policy holder’s death and providing income replacement to support those who may have been relying on the deceased’s income.
Life insurance can also have tax benefits. For example, by providing a pot of funds to pay inheritance tax (IHT) arising on the policy holder’s death. If the policy has been written in trust, it should not form part of the policy holder’s estate for IHT purposes.
Making a Will is by no means an alternative to life insurance. Rather, it allows the person who makes the Will (the ‘testator’) to control the distribution of the assets which he can dispose of on death (his ‘free estate’) and to protect assets in trust for vulnerable beneficiaries (and vice versa).
Under English law, without a valid Will in place, strict orders of entitlement to benefit from an estate and to carry out its administration could otherwise apply, and these statutory rules often do not match the deceased’s wishes. In addition, if structured correctly, a Will can bring tax benefits to the estate in question. For example, by making use of valuable reliefs and exemptions which might otherwise be lost if the estate were left to pass under the intestacy rules.
Although under English law it is possible for an intestacy to be varied, this can be a costly process. It would need the consent of all the beneficiaries affected and must be done within two years of the death to have the requisite IHT and/or capital gains tax effect. This could have been avoided if an appropriate Will had been made before the death.
As well as containing an appointment of executors, a Will also acts as a convenient place for a testator who has children under the age of 18 to appoint guardians. Without a Will or separate appointment of guardians in writing, the decision as to who should take care of the deceased’s children in these circumstances would fall to the Court and its decision may not match the deceased’s wishes.
Life insurance and Wills can complement each other by providing the policy holder with a tax-efficient means of financial security and control over his estate, but they differ in their effect. For example, as the insurance pay-out is typically not subject to the probate process (unlike most assets passing under a Will), the policy proceeds can be accessible to the beneficiaries more quickly and give them financial support when it is needed most.
Meanwhile, the Will can act as a comprehensive plan for the structured distribution of assets and allows the testator to put in place before his death tax planning and asset protection strategies which can benefit his chosen heirs for many years afterwards.
There is a strict separation in the roles of legal and financial advisers in terms of what they are authorised to advise on and this stems from the differences in what they are qualified and regulated to do. But there are ways that financial advisers can still provide invaluable help to solicitors and their mutual clients when it comes to Wills and succession planning, even if it is the latter who draft the Wills and related documents and advise the clients on the suitable terms and provisions to include.
For example, by checking that their clients have Wills in place and are keeping them under regular review, and by helping the clients to keep clear records of their assets and liabilities. Open communication and collaboration between the legal and financial advisers is often the ideal approach, where authorised by the client.