Life insurance has hit the headlines since the 2024 Autumn Budget as a possible antidote to the major changes proposed to Agricultural Property Relief, Business Property Relief and Inheritance Tax (IHT) on pensions.
The reason why life insurance is attracting so much traction is born from budget frustration.
For financial planners, life insurance has always been a first priority in a strong financial plan.
Have you got sufficient life insurance?
It is a well-known fact that insufficient people in the UK have life insurance (despite insuring pets, hoovers, laptops, golf clubs etc). There is a misconception of life insurance being ‘expensive’ – generally based on assumption rather than investigating cost – but it can be far more affordable than people think.
It is also true that even fewer people have sufficient life insurance.
Some examples of why you might need life insurance include:
- To repay a debt such as a mortgage or loan.
- To provide for a young family (capital or income for household expenditure, school, university costs).
- To provide in lieu of your state pension (your state pension dies with you, can your spouse/partner manage without it?)
- To provide a legacy for someone after your lifetime.
- To pay IHT should you die in the first seven years of making a gift (potentially exempt transfer).
- To pay the potential IHT bill on your death (meaning your beneficiaries don’t need to find the cash).
These latter two points are those that have moved into the spotlight post-budget. Both are excellent planning ideas that can make a significant difference to what you can leave behind to your beneficiaries.
They also require accurate implementation to carefully navigate both the gifting rules and, potentially, the periodic tax charge.
It is imperative that both are written in to trust, both to avoid exacerbating the IHT liability and also to ensure they can be administered outside of the estate to pay the tax.
It will often be worth appointing a professional trust company to ease the administration after death.
Review your life insurance
For those who may already have some form of life insurance, here are some key aspects to consider:
- Is your policy written in trust? If life insurance is not written in trust, the proceeds will be paid to your estate meaning that it will form part of your estate value for IHT, and your beneficiaries will need to apply for a grant of probate to access the funds.
- What is the term of your policy? Many policies are written over time frames to match the age of children becoming independent or debts being repaid. Do you need insurance after that time?
- Who owns the policy? Is it in joint names, a sole name or owned by your business? All of these factors will dictate when the policy pays out and to whom.
- Are the premiums guaranteed? Allowing you to budget properly.
Life insurance, like all aspects of financial planning should be reviewed on a regular basis.
It is easy to think that once it is in place that is ‘job done’, but your own circumstances and legislation will continue to evolve over time and therefore the original advice and policy/policies may need to be adapted, updated, augmented or replaced.
Life insurance is often presented as a cost-based decision but the offering by providers has evolved significantly, and it is worth taking advice to understand all of the benefits of the policy and the ‘mechanics’ eg is the premium fixed, can the cover be increased, and could the term be extended?
It is also worth checking what benefits you or your beneficiaries would receive from your employer, and how those benefits would be treated for tax purposes.
Life insurance is a cornerstone of financial planning, but insurance can extend beyond this to include, for example, critical illness cover, income protection and private medical care.
