Life insurance is an important thing to consider at any stage of your life, especially if you have financial responsibilities like a mortgage or family commitments. Life cover can be used for many reasons, and often is just as important in later life as it is when we are younger. For example, life cover can be a simple and effective way of paying for an Inheritance Tax (IHT) bill, or to ensure that a dependant spouse has enough to live on in the event of the person with more income coming into the household passing away unexpectantly. This means that your loved ones are not left financially disadvantaged after you have gone, and that your assets can be passed to them rather than to the tax man.
As premiums are calculated based on age and health, amongst other factors, this means that life insurance is often cheaper for healthy, young individuals. However, the increased costs of cover does not outweigh the benefits of life insurance in later life. Those you leave behind after your death can benefit from your life insurance policy, as this may help to cover any inheritance tax (IHT) liabilities and funeral costs.
What type of life cover is right for me?
There are two main types of life insurance, each with their own features and benefits depending on what you are looking for in a policy.
1. Term life insurance policy: This runs for a fixed period of time - known as the ‘term’ of your policy -such as five , 10 or 25 years. This kind of policy only pays out if you die during the policy. There’s no lump sum payable at the end of the policy term.
2. A whole-of-life policy: This will pay out no matter when you die, as long as you keep up with your premium payments. These tend to be used to pay an IHT bill or to cover funeral costs, and are more expensive as they are GUARANTEED to pay out.
For expert advice on insurance matters why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.
Can I use life insurance to pay inheritance tax?
You can take out a whole-of-life insurance policy, which remains in force until your death, to cover the IHT bill you expect your heirs to have to pay. For example, if you were expecting to be £200,000 over the threshold, you would need a policy that will pay out £80,000 to cover the IHT bill in full (40% of the £200k). However, to avoid the proceeds of the policy also incurring IHT, you’ll need to write it in trust.
If your family doesn’t need your financial support, but you would like to leave them with a lump sum for funeral costs, to pay existing debts or as a gift, you can also take over 50s life insurance.
If you are giving a loved one a valuable gift in later life, you can also consider taking out a level term life insurance policy that will cover the IHT bill on that gift should you die within the next seven years. Again, it will have to be written in trust to be used this way. And either way, it’s important to arrange the cover via a qualified Independent Financial Adviser to ensure it is appropriate and affordable based on your individual circumstances.
How do I put a life insurance policy in trust?
Writing a life insurance policy in trust means the pay out goes directly to your beneficiaries and not to your legal estate, so it won’t be subject to IHT. It involves setting up a legal arrangement that appoints trustees, such as a solicitor or a family friend, to look after the policy on behalf of your beneficiaries. It’s relatively straightforward to set up. Your adviser will ensure your policy is set up under trust if appropriate and, in most cases, the service will be free.
You can put your policy in trust at any time, though it makes sense to do it as early as possible, preferably when you first take out the cover. The advantages include:
- The pay out does not count towards your estate and is therefore not liable for IHT.
- You can control who gets the money from your life insurance policy by specifying the beneficiaries.
- Your heirs should receive the money more quickly – and in time to cover the IHT bill – if the policy does not form part of your estate.
Everyone’s circumstances are different, and no matter what your age, life cover could be appropriate for you and your family. By ensuring you receive advice from a qualified Independent Financial Adviser, you can rest assured that if there is a need, they will uncover this and help you to set up a policy to meet your needs if required.
Written by Coreena Dutton FPFS, Independent Financial Adviser/Chartered Financial Planner, Integrity365
Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.