Wednesday, 7 May 2014

Guaranteeing an Inheritance for your Beneficiaries.

Guaranteeing an Inheritance for your Beneficiaries.

(Disclaimer – Please note that this article doesn't constitute advice as individual circumstances will dictate suitability. All information and suitability should be discussed in detail with a suitably qualified adviser, accountant or solicitor)

Using a Whole of Life policy to provide an inheritance may not always be the first benefit considered when using this type of product. More often, Whole of Life policies are used for Funeral Planning or indeed Estate Planning (to potentially cover an Inheritance Tax liability).

However, using a Whole of Life policy to provide a GUARANTEED Inheritance may work really well for certain people.

My business buys in a lot of Life Insurance leads as part of our business plan and when getting to speak to client’s it can lead to numerous different conversations based around Life Cover, products and costs. One recent conversation I had was as follows:

Male client aged 62 made an enquiry regarding £100,000 of Life Assurance. After speaking to the gentleman about his concerns and the basis for his initial enquiry, it became apparent that he wanted to leave a sizeable lump sum for his family, namely two sons, on death.

After discussing the advantages and disadvantages of Term assurance, my client decided that type of policy wasn't suitable as the end of the policy term may likely finish before making a claim.

Therefore, my client wanted something that would guarantee to pay on death. So, I quoted a Whole of Life policy to provide a guaranteed sum assured of £100,000.

The premiums offered by various Insurance Companies ranged from £142 – £201 per month, payable for the rest of my client’s lifetime. My client’s first reaction was to say it wasn't value and he would be better to pay the money into a savings account (and/or investment).

Then, we looked a little more closely at the figures. Taking an annual premium of £175 per month (£2,100 annually) Life expectancy for male aged 62 is expected to be approximately 78 Calculating annual premium X life expectancy to age 78 = £33,600 in premiums payable. Calculating annual premium X life expectancy to age 94 = £67,200 in premiums payable. Now lets look at the returns should £175 per month be invested into a low risk Cash Isa @2.5% annual interest. (Obviously, greater returns could be achieved but may contain an element of RISK.)

16 years returns £ 41,261 (to age 78)
32 years returns £102,781 (to age 94)

As we can see, if the client paid into a low risk, tax efficient contract up to average life expectancy the return would be £41,261.

However, If my client was to die, the Whole of Life contract would pay £100,000 (a difference of £58,739)

On death your ISA investment would make up part of your estate and depending on your total assets may be taxable. As part of a whole of life policy written into trust for your beneficiaries, the sum assured would fall outside of your estate and therefore not be part of your potentially taxable assets and any sum assured would not be taxable in receipt to your nominated beneficiaries.

This analogy can also be considered if you have existing savings. In effect, you could release regular payments from existing savings to fund a Whole of Life policy. In fact, if your estate is considerable and potentially subject to Inheritance Tax, then your payments could be classed as gifted and not subject to taxation under the 7 year rule.

Hopefully, some of the benefits of Whole of Life policies outside of their general use have been highlighted and we would genuinely love to discuss further if of interest.

Comments welcome

Drop in protection cover leaves mortgage holders exposed | Financial Reporter

Drop in protection cover leaves mortgage holders exposed | Financial Reporter

Scottish Widows warns that an increasing number of mortgage holders are financially exposed as levels of protection cover drop.
Around 14.5 million UK adults over 18 have a mortgage but only 50% hold life cover. Those who don’t could be at risk of losing their home if the unforeseen were to happen.

This is set against a backdrop where nearly a fifth (19%) of mortgage holders said they had no idea how they would cover their household bills if they or their partner were unable to work due to incapacity, serious illness, an accident or death. A further 48% said their savings would last just a couple of months at the most.

Mortgage holders are also at risk of over-estimating the support they would receive from other sources, including their employer and the state. Sixty-four percent believe their employer will pay them either a full salary or a full salary followed by a partial salary if they are off work for a long term.  The reality is that people may be eligible for Statutory Sick Pay at £87.55 for up to 28 weeks.  Employees may also be entitled to Occupational Sick Pay, a payment made over the level of SSP, dependent on a company’s policy and often their length of service.
This situation is compounded by reported household expenditure for this group increasing by over £65 a month in the last year. Mortgage holders now spend an average of £1,393 each month on household costs, compared to £1,326 in 2013.  Financial resilience could further be impacted if interest rates rise, potentially pushing an increasing number of mortgage holders into severe difficulty, including a high number of first-time buyers who have never experienced a rise in rates.

Protection cover amongst mortgage holders has dropped since last year with only 50% currently owning life insurance, compared to 54% in 2013.  Furthermore, just 17% of mortgage holders have critical illness cover, down from 20% in 2013 and 7% hold income protection, a drop of 3% since last year, according to the latest Protection Report from Scottish Widows.

Richard Jones,Director, Annuities, Bancassurance and Protection, Scottish Widows said: 

“Protecting a home is about protecting a way of life that encompasses family, community and often a business. With this in mind, the impact of losing a home could be even greater than we initially realise. Whilst affordability cannot be ignored, people with mortgages do need to review and develop a more robust plan to ensure they are protected should the unforeseen happen. It’s all about making sure you have the right cover at the right time of your life, giving people the peace of mind that their families will be able to keep their home and be financially covered come what may."