Paying Inheritance Tax
Whole-of-life insurance policies can be
a useful way to cover a future Inheritance Tax bill. If you think your estate will have to pay
Inheritance Tax when you die, you could set up a whole-of-life insurance policy to cover the tax
due, meaning that more is passed to your beneficiaries. To ensure the proceeds of the life
insurance policy are not included in your estate, though, it is vital that the policy be written
in an appropriate trust. This is a very specialist area of estate planning, and you should
obtain professional financial advice.
A whole-of-life insurance policy has a
double benefit: not only are the proceeds of the policy outside your estate for Inheritance Tax
purposes, but the premium paid for the policy will reduce the value of your estate while you're
alive, further reducing your estate's future Inheritance Tax bill.
Different types of policy
There are different types of
whole-of-life insurance – some offer a set payout from the outset, others are linked to
investments, and the payout will depend on performance. Investment-linked policies are either
unit-linked policies, linked to funds or with-profits policies which offer bonuses.
Some whole-of-life policies require
that premiums are paid all the way up to your death. Others become paid-up at a certain age and
waive premiums from that point onwards.
Whole-of-life policies (but not
all) have an investment element and therefore a surrender value. If, however, you cancel the
policy and cash it in, you will lose your cover. Where there is an investment element, your
premiums are usually reviewed after ten years, and then every five years.
Whole-of-life policies are also
available without an investment element and with guaranteed or investment-linked premiums from
some providers.
Reviews
The level of protection selected will
normally be guaranteed for the first ten years, at which point it will be reviewed to see how
much protection can be provided in the future. If the review shows that the same level of
protection can be carried on, it will be guaranteed to the next review date.
If the review reveals that the
same level of protection can’t continue, you’ll have two choices:
- Increase your payments
- Keep your payments the same and reduce your level of protection
Maximum cover
Maximum cover offers a high initial
level of cover for a lower premium until the first plan review, which is normally after ten
years. The low premium is achieved because very little of your premium is kept back for
investment, as most of it is used to pay for the life insurance.
After a review, you may have to
increase your premiums significantly to keep the same level of cover, as this depends on how
well the cash in the investment reserve (underlying fund) has performed.
Standard cover
This cover balances the level of life
insurance with adequate investment to support the policy in later years. This maintains the
original premium throughout the life of the policy. However, it relies on the value of units
invested in the underlying fund growing at a certain level each year. Increased charges or poor
performance of the fund could mean you’ll have to increase your monthly premium to keep the same
level of cover.
