Your Will says who will benefit when you die, but will the finances be available to replace your income, help raise your children while financially dependent, or pay off debts including potential Inheritance Tax?
The pandemic has made many of us realise the importance of having life insurance as a fundamental part of a sound financial plan. It’s understandable that we would rather not think of a time when we're no longer around. However, as we’ve seen over the last 15 months, it's important to protect the things that really matter, in case the unexpected happens.
Why life insurance?
We insure our cars, our homes, our pets, and even our mobile phones. So it goes without saying that we ourselves should also be insured for our full replacement value, in the event of our premature death.
Life insurance will help you to financially protect your family after you have died. It could pay out a cash sum if you die while covered by the policy. You choose the amount of life cover you need and how long you need it for, and you can pay your premiums monthly or annually.
Financial safety net
Life insurance provides a safety net for your family and loved ones if you die, helping them cope during an otherwise difficult time. Ultimately, it offers reassurance that your family would be protected financially should the worst happen.
Life insurance and Trusts
A Trust provides greater certainty around who benefits, saving time and reducing worry compared to leaving life cover benefits in a will or through intestacy (when somebody dies without a will).
Here are three points to bear in mind when considering trusts.
- Fast and efficient payments
A claim on a life policy is likely to be made at a stressful time for your family, with both emotional and administration issues to be taken on board. A trust ensures that the life cover benefit can be paid to the trustees and provided to beneficiaries straight away. So their financial position can be supported immediately, and they can focus on the future.
The proceeds of the claim can be paid to the trustees simply on producing:
the death certificate
a copy of the trust
other relevant documents
If the policy were not under trust, you would need to receive a grant of probate and letters of administration which can take several months and delay the payout.
- Reducing inheritance tax liability
When a policy is written in trust, premiums are normally treated as gifts for inheritance tax purposes, and can usually be covered by exemptions. As a result, the proceeds will not form part of the deceased estate, where inheritance tax becomes payable on taxable assets over £325,000 in the 2021/22 tax year.
- Flexibility and a degree of control
The trustees you choose are able to decide who benefits from a wide range of potential beneficiaries, including family, at what time and in what shares. To help the trustees decide, you can give them written guidance as your wishes or intentions change.
Trusts and estate planning
To ensure the proceeds of the life insurance policy are not included in your estate, it is vital that the policy be written in an appropriate trust. This is a very complicated area of estate planning and you should obtain professional financial advice. While Panthera Estate Planning can advise on trusts, as a company we are not able to give advice on arranging life insurance, Paul Hammond is. Contact him for an appointment to discuss your life insurance requirements and how it integrates into your estate planning.
Types of life insurance
There are two main types of life cover:
Term Life insurance
With a term life insurance policy, you choose the amount you want to be insured for and the period for which you want cover. This is the most basic type of life insurance. If you die within the term, the policy pays out to your beneficiaries. If you don't die during the term, the policy doesn't pay out and the premiums you've paid are not returned to you.
A whole-of-life insurance policy is designed to give you a specified amount of cover for the whole of your life and pays out when you die, whenever that is. Because it's guaranteed that you'll die at some point (and therefore that the policy will have to pay out), these policies are more expensive than term insurance policies, which only pay out if you die within a certain timeframe. Your beneficiaries receive a guaranteed tax-free payment whenever you die.
Whole-of-life policies and 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. This means that more is passed to your beneficiaries.
A whole-of-life insurance policy has a double benefit:
1. The proceeds of the policy outside your estate for Inheritance Tax purposes.
2. 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 whole-life policies
There are different types of whole-of-life insurance policy. Some offer a set pay out from the outset, whilst others are linked to investments and the pay out will depend on their performance. Investment-linked policies are either unit-linked policies linked to funds, or with-profits policies that 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.
Not sure what type of insurance is right for you?
Call us at Panthera Estate Planning to discuss your situation and circumstances in your initial online consultation. If required, Paul Hammond can offer professional planning advice and services through his regulated company.