The value of life insurance
So you’ve done the right thing for your loved ones and arranged life cover to protect your family from financial hardship, but did you know that this policy can be taxed as part of your estate on the normal IHT rates?
Essentially you may have been paying your monthly premiums for an insured amount that could be 40% less than what you originally covered yourself for due to taxation. Most people who insure their life do so because they want to ensure their loved ones are protected from financial harm if they pass away and understandably assume that once a policy has been bought, the job is done right?
The answer isn’t necessarily so straightforward.
In the event of a claim, the policy proceeds will form part of the deceased’s estate and only pay out once probate has been granted.
For many people, this could be fine. However, for a variety of reasons, this could lead to delays in the beneficiaries’ receiving the funds when they need it most and depending on if there is a Will, the proceeds may be distributed based on the “rules of intestacy” and not go to the individuals originally intended.
Finally, in some cases, the estate's value can mean that the payout triggers a large inheritance tax bill that needs to be paid. Fortunately, a great way to avoid this scenario and help ensure that the policy proceeds go to the right people at the right time and that they get the right amount is to set up a trust for life insurance.
What is a life insurance Trust?
Put, A trust is a legal arrangement that keeps an asset – in this case, your life insurance policy – separate from the rest of your estate.
The benefit of this is that your insurer doesn’t need to wait for probate to be granted, so the claim is paid out quickly, the trustees can make sure the money goes to the right people, and it no longer counts toward your estate for IHT calculations so it’s the full amount.
As an adviser, I regularly review our client’s needs and existing cover not being in trust comes up time and again, and I make sure that even if no change in the cover is needed, at minimum, we ensure Trusts get set up where appropriate.
“Is your current life insurance policy potentially worth only 60% of the value you initially thought?"
The Mesa Financial service
There can be extreme complexities to consider when looking at financial positions, and it is key to get the correct advice based on your circumstances. If you are looking for a local trusted adviser, please get in touch with one of our team.
Case study
IHT saving of £300,000
4 years ago, a client passed unexpectedly. His life cover of £1.2m was arranged to help his wife clear their outstanding mortgage balance and have enough to help raise their 12-year-old son.
His life cover had been written into trust, and the claim was paid out in just 9 days from when the insurer was notified. As his partner was a trustee of the policy, she could draw on some of the money to pay off their mortgage and secure the family home for herself and her son.
- The value of their home = £1.4m (Asset).
- The outstanding mortgage balance was approx £850m (Liability).
- Life cover was £1.2m (in trust - not included as an asset).
- IHT bill £0 as the net value of assets = £550,000, so below the Nil rate band for married couples.
But if the life cover was not in trust and counted as an asset, the Net value would be £1,750,000 (£550k + £1.2m), meaning £750k taxable at 40% = IHT bill of £300,000 Probate was eventually granted after 18 months.
