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There are many forms of life assurance, some of which are mentioned in the adjoining pages to this section. Choosing the right one for you can depend upon a number of factors including tax, cost and the protection required.
You can use the information and tools on this site to gain a basic understanding of what is available, however this information is only an overview. In our opinion, only expert, independent advice following a full review of your circumstances will ensure that you find a solution that provides peace of mind.
Life assurance can be used to protect income, loved ones and businesses and, in certain circumstances, can be arranged in such a way as to minimise the effect of tax.
Whole of Life Assurance
As the name suggests a whole life policy is designed to provide life assurance cover for your whole life and doesn’t finish at a pre-defined term. If you continue paying into a whole-life plan it will eventually pay out on your death so they are normally significantly more expensive than the equivalent term assurance as they are effectively guaranteed to pay out their benefit eventually.
Often whole life plans will contain a savings component, the idea of which is to build up a fund in the early years which is used to subsidise the high costs of life assurance in the later years. In some cases, this may provide you with a lump sum if you cash in the plan after many years, but it is not a savings plan, the insurer is effectively buying themselves out of the ongoing life assurance risk. In most cases even if the fund runs out of money, the whole life plan will still provide the death benefits originally agreed but you should carefully check your policy wording.
In most cases, premiums are fixed for the term (whole of life) of the policy but in some cases premiums are reviewable based on the investment return and may need to be amended depending upon investment returns.
Whole of Life plans and Inheritance Tax
Whole of life policies are often used to provide a cash sum to cover the estate liability to inheritance tax on death. They can be relatively inexpensive at pre-retirement ages and particularly on joint life second death plans which only pay out after you and your partner are both deceased. The reason they are useful and relatively inexpensive, is that if you are married your partner will not pay any IHT on your death (and vice versa) but when the second life dies the whole estate will be subject to IHT. The whole of life plan is written in trust (thereby not attracting IHT on the lump sum payable on death) and pays out to cover the beneficiaries IHT liability.
This is just one option to look at if you will have a significant IHT liability on death. We specialise in effective tax planning across income tax, capital gains and estate planning. Please contact us on 01842 752140 if you wish to discuss any aspect of your finances with us.
Term Assurance
Term insurance is the cheapest - and simplest - form of life insurance. You insure yourself for a set term - until a loan is paid off, for example. It doesn't contain any investment element - it simply promises to pay out if you die within the term. If you don't die within that time, you receive nothing.
Term policies can either be level or decreasing. A level policy simply means the sum assured remains 'level throughout the term of the policy. If you die on the first day of the policy, you get exactly the same sum as you would if you died near the end of the policy. A decreasing term assurance policy on the other hand, will pay out more at the beginning of the policy than it would at the end.
The way a term policy pays out can also come in one of two ways. Those that pay out a tax-free lump sum on death and those that pay a tax-free income to the end of the term, known as family income benefit policies. As usual there are pros and cons to both, a lump-sum policy can be more flexible because it allows your family to have a mixture of lump sum and income upon your death, but the income may be dependent upon investment returns at the time of death. A family income policy on the other hand is often cheaper because the liability is always decreasing for the insurer, for example, if you die in the 18th year of a 20-year policy, the insurers would only have to pay income for two years. It's also easier to work out the level of cover with this type of policy because you simply work out the income you would need to replace.
Business protection/cover
This deals with protecting your business from the adverse financial effects of the death of a key person, partner or shareholder. Business protection can be especially important to smaller companies whose reliance on key individuals for profit may be greater than large corporates.
There are two main types of business assurance, key man and partnership assurance / director share purchase.
Key Man
Is used to inject a lump sum of cash into the business in the event of the loss of a 'key person'. A key person may be a top salesman, or a key designer in a design company etc, someone whose death would have a direct and adverse effect on the company's income. The usual solution is a term assurance policy whose sum assured should be worked out with your financial adviser.
Partnership / Director Share Purchase
Deals with protecting the families and co-owners in the event of the death of one of the partners / directors. Each party agrees before hand the value of his or her share and a combination of term assurance policies and legal documents are put in place to ensure that in the event of a partner or shareholders death, the remaining co-owners have a sum in place to buy out the family of the deceased for a fair sum.
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