In the case of a life insurance policy that's in Trust, any future payout on death will be paid into the Trust. The Trust will then have to pay the money to whoever is entitled to it (the beneficiaries) usually the surviving partner or spouse or their children.
There are many different types of trust however the one usually used in conjunction with life insurance policies is a Flexible Trust. It's called this because whoever creates the Trust can change or cancel it in the future.
There are 2 main reasons:
It avoids Probate - Probate is an often time consuming and expensive legal procedure where the deceased's estate is administered and distributed in accordance with their will. By putting a life insurance policy in Trust it goes straight to the beneficiaries without delay usually without any legal fees.
It avoids Inheritance Tax - When someone dies leaving their estate to the next generation of their family, the tax man may be entitled to a significant proportion of it. This is called Inheritance Tax. How much he'll take depends on the size of the estate; there's a limit and whatever it is over that limit he'll take 40%. Putting a policy in Trust means the payout on death would not be liable to Inheritance Tax.
For further information on Inheritance Tax click here: Inheritance Tax
Although it's a good idea to get advice from a solicitor, essentially it's quite easy to set up a Flexible Trust for your life insurance policy. You'll find the insurance companies have off-the-shelf Trust documents that will need the details and signatures of the people setting it up (the Grantees) and the people who will look after the Trust (the Trustees). Once the forms are complete, you can send them off to the insurance company. They will check it, set the Trust up and return the Trust documents for you to keep safely. There is not usually a charge for this service.
For people who would like their beneficiaries to receive life insurance payouts as quickly and tax efficiently as possible.