Posts Tagged: Inheritance Tax

According to one of the largest UK life insurance companies, just 1% of life policies are written in trust. That is disgraceful and reflects poorly on the financial industry.

Let’s explain.

If your life insurance policy is Written in Trust then, in the event of a claim, the insurance company pays out directly to the beneficiaries you name on the policy. The significance of this is easily missed.

It means that if the policy is Written in Trust, the proceeds from the policy never form part of your legal estate and are not subject to Inheritance Tax. The importance of this is illustrated by the following figures:

Take Mr A. He’s a widower and wants to leave everything equally to his two sons. He owns his home which is currently worth 245,000 with a 10,000 outstanding mortgage. His investments are valued at 52,000 and his car and other chattels are worth 18,000. He also owns a life insurance policy for 100,000 which is not written in trust. We assume that the costs of administering his estate and obtaining probate would be 5,000.

If Mr A were to die now, his estate would be worth 400,000 less Inheritance Tax. Inheritance Tax is currently levied at 40% on the value of his estate over and above 275,000 that means that the taxman will walk off with 50,000 and his sons would each receive 175,000.

Now lets assume exactly the same figures except that in this case the life insurance policy is Written in Trust with Mr A’s sons as equal beneficiaries. Because the life insurance company pays out directly to his sons, they each receive 50,000 straight away and non of the money is included in Mr A’s estate. This means that his estate is now worth 300,000 and the taxman can only walk away with 10,000. Each of his sons receives 20,000 more and tax-free!

So simply by signing a few forms, Mr A saves 40,000 tax!

Is there a catch? No all the documentation is standard and is provided totally free of charge by the life insurance company. Your broker through whom you buy the policy, should complete the documentation for you, again free of charge. All you have to do is give the details of the beneficiaries to the broker and sign the form. Solicitors are not required. In the event of a claim, the life insurance company then has to pay out directly to the beneficiaries. Job done! Poor Mr Taxman!

Even if your policy is designed to repay a mortgage, it should be Written in Trust for your partner. Then, rather than your estate receiving the money and using it pay off the mortgage, the money can be paid directly to your partner. This saves legal delays, solicitor’s and probate fees and loads of hassle. Your partner can then use the money to personally pay off the mortgage. Whether this also saves you Inheritance tax will depend on the value of your estate and how you have structured your Will.

So we believe that a life insurance policy Written I Trust is a win win situation. And there aren’t many of those around these days! We can’t see any drawbacks.

Bye the way, no matter what you decide to do, always ensure that you have an up-to-date Will.

More and more people are buying life insurance online and the numbers seem to be doubling every two years. The reasons are clear. Prices are lower on the Internet and life insurance is fundamentally a simple insurance product.

Despite the underlying simplicity of life insurance, most web sites channel their online clients through a telephone based help and advice service manned by experienced personnel. They represent your safety net so if a little technical knowledge is called for, help is at hand.

But its always a good idea to have a few Top Tips in your back pocket when youre shopping online for life insurance. Theyll help you ask the right questions and find the best policy.

1.Always have your Life Insurance policy Written in Trust.

This means that in the event of a claim, the money goes directly and immediately to the person(s) you nominate when you first take the policy out. It also avoids all possibility of your estate having to pay Inheritance Tax on the proceeds of your policy and that could represent a 40% tax saving !

All you have to do is tell the online brokerage organising your policy that you want your policy Written in Trust and the names of the people who the life insurance company pay in the event of a claim. They will then sort it all out for you. The extra good news is that this service is invariably free of charge. So its a win win situation and there arent many of those around these days !

2.In the early years a Reviewable Life Insurance Policy will be cheaper but a Guaranteed Policy will work out a better buy in the longer term.

With a Guaranteed Policy the insurance company guarantees never to increase your policys premium.

With a Reviewable Policy you agree that your insurance company can review the cost of your policy at regular intervals. But dont be kidded in our experience a review is just another word for a price increase. After all, whos ever heard of an insurance company passing up a chance to charge you more! The review intervals are usually between 2 to 5 years but this does vary between insurance companies. You will find the details of the review intervals on the documents sent to you before you accept the insurance these are called The Key Features Documents.

So, comparing otherwise like for like policies, in the early years the premiums for a Reviewable Policy will undoubtedly be lower than the premiums for a Guaranteed Policy. Thereafter, the premiums for a Reviewable Policy increase eventually catching up with and overtaking, the premium for a Guaranteed Policy.

In our experience, you can expect the monthly premiums for a Reviewable Policy to exceed those of a Guaranteed policy in about 7 to 10 years and then within the following 10 years, more than double again. If your budget is currently tight then by all means choose a Reviewable Policy – after all your salary may increase in coming years and ease the strain. On the other hand, if the premiums for a Guaranteed Policy are affordable, we think they represent your best buy.

A footnote. Many insurance companies have stopped offering Guaranteed rates for standalone critical illness insurance policies. This because they have experienced much higher claim rates than they initially expected. However, you may still find a Guaranteed life insurance policy that also provides critical illness cover. As we have explained, Guaranteed rates are especially good value and if you can get a quote for a Guaranteed life policy that includes critical illness cover, you may have a real bargain.

3.Thinking about a Joint Life Insurance Policy?

A Joint Life Insurance policy is usually written on a first death basis. This means that the policy will pay out on the death of the first policyholder, subject to the policy being in force at the time. This leaves the second person uninsured and older. Older people can struggle to get life insurance at an affordable premium, so rather than a Joint Policy consider taking out separate policies now. Overall it will work out a little dearer – but you get twice the cover and double the peace of mind.

4.Taking out a Life Insurance Policy? Now would be an ideal time to include Critical Illness cover.

Are you likely to need Critical Illness Insurance in the future? Yes? Then consider adding it now to the life insurance policy youre arranging. Why? There are three reasons.

Firstly, a Life Insurance policy combined with Critical Illness cover will work out significantly cheaper than buying two separate policies. Secondly, as we have already explained in the footnote to Tip 2, you may be able to buy a combined Life and Critical Illness policy with a guaranteed premium. That could be a real bargain. Finally, premiums for critical illness cover increase rapidly as you get older so the sooner you take it out, the cheaper it will be.

5.it isnt confuse Terminal Illness cover with Critical Illness cover.

Theres world of difference between Terminal Illness and Critical Illness cover so its important to understand the difference.

Terminal Illness cover pays out the insured lump sum if a Medical Doctor diagnoses you with an illness from which the Doctor expects you to die within 12 months. Most good life policies automatically include Terminal Illness cover at no extra cost. Its basically an early, and welcome policy payout.

A Critical Illness policy pays out the insured lump sum if you are diagnosed with one of a wide range chronic illness and there is no life expectancy criteria. Indeed, with many of the insured illnesses you could expect to survive for many years. For example: certain cancers, heart disease, stroke, multiple sclerosis, loss of speech, sight or hearing, onset of Parkinsons or Alzheimers disease, third degree burns etc. Say you were an engineer aged 40 and you lost your sight. A Critical Illness policy would pay out immediately and that money could well be vital in helping you and your family through many difficult financial years ahead. If you just had Terminal Illness cover thered be no chance of a payout.

So as you can see, Critical Illness cover is far more comprehensive than simple Terminal Illness cover and for that reason critical illness cover always costs you extra.

Life Insurance. How The New Regulations Affect Policies Written In Trust.

In his spring Budget the Chancellor Gordon Brown announced swinging measures to tackle the use of Trusts being used to avoid Inheritance Tax. The immediate reaction amongst the financial and legal fraternity amounted to panic and confusion. Within ten days of the budget speech the estimates of the numbers of people that could be hit by the new anti-trust provisions hit 4.5 million.

Then, following the publication of the draft Finance Bill, the estimates fell to 1 million people. So, with specific reference to life insurance policies written in trust, whats happening?

Well firstly before we go any further, we have to make the point that this article is commentating on the position based on the first draft of the Finance Bill and itll be early July 2006 before that bill becomes law. As I write, the legislation still has to pass through parliament and its possible that the situation could change yet again. If it does I will keep you informed.

Within weeks of the budget speech, the Government retreated from its previously held position that all life policies written in trust are caught by the new legislation. The current position is that if your life insurance policy was written in trust before budget day 2006, then the money in the trust remains totally free of tax and fees. The legislation is not now to be retrospective. Thats one headache dispensed with.

However, if your policy was written in trust after the Spring Budget Day in 2006, then the new tax rules do apply.

For most people, the purpose of writing a life insurance policy in trust is to ensure that the policy pays out quickly and directly to where you want the money to go often to a mortgage provider to repay the mortgage or to beneficiaries in the family to allow them to spend straight away as they like and tax free. These trusts that break upon death, are not now affected by the new regulations. Thats because only trusts that continue to hold money after the policyholders death are targeted by the new rules.

New life insurance policies written in trust will now be caught by a tax charge if the policys payout makes the deceaseds estate exceed the Inheritance Tax Threshold (IHT) of 285,000 and the policy is written in a type of trust known as an interest-in-possession trust.

Interest-in-possession trusts have been used to hold and invest the money paid out from a life insurance policy and pay the trusts income to the spouse. The capital then passes to the children on the death of the spouse. Following the budget, these arrangements will be subject to a 40% IHT charge when then money passes into the trust for your spouse – plus a 6% tax charge every ten years and an exit fee. These taxes can be avoided if the you give your spouse significant control over the trust, which many people may perhaps not want to do especially if they are in a second marriage with children from previous relationships. The alternative is to use a bare trust as this type of trust is not caught by the new regulations. However, if you do use a bare trust, the money automatically goes to your children when they reach the age of 18.

If you are buying a new life insurance policy and want to use it to pay off a mortgage or provide immediate money for your family if you were to die, then you should still consider writing our policy in trust. However, it becomes more important than ever to buy the policy through a broker who is fully versed in the current requirements for trusts and can ensure you get exactly the type of trust you need.