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

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