Many UK families are missing out on potential tax-efficient inheritance planning due to a lack of understanding around the difference between life insurance and life assurance, according to national IFA firm Continuum.
Whilst the basics of life insurance are easy to understand, a lack of understanding of the differences between life, or term, insurance and whole of life cover, or life assurance, is leaving many families missing out on tax-efficient inheritance planning cover.
Life insurance or ‘term insurance’ is designed to ensure that your dependents receive a lump sum if you were to die prematurely.
When arranging life insurance the key question is how large that lump sum should be and what the set amount of time it should cover needs to be. It is entirely possible to arrange a sum large enough to pay off your mortgage, which is the major expense for most families, and provide an income to replace your own.
If you live longer than the term covered by the life insurance policy, the policy ends and no payout is made.
Term cover, although the most popular, is not the only kind of life cover there is.
Whole of life cover, or life assurance is, as you’d expect, an insurance plan that lasts for an entire lifetime, rather than a set term. Like life insurance, it is designed to provide a lump sum payment to your family.
Your family is guaranteed the agreed payout with a life assurance policy so long as you pay your premiums, although some insurers have a cut-off age after which you no longer have to pay premiums for your loved ones to receive the agreed sum.
Whilst life assurance tends to be more expensive, due to the fact it is designed to pay out sooner or later, it can be structured to provide tax-efficient inheritance planning for your family by having the policy written in trust by a financial adviser. By having a life assurance policy written in trust you can avoid the costly 40% inheritance tax you would have to pay should you leave the sum to your family in cash.
A life assurance lump sum payment can also be setup in trust for family to help towards or ideally meet the inheritance tax bill that will be levied against other areas of your estate.
Martin Brown, Managing Partner at Continuum, said: “Life does not always go the way we hope. Accidents happen. Illness can strike at any time. The one thing we can be sure of is that bills will still need to be paid and could your loved ones manage without you?
“We will all die eventually and it is sensible to look at some form of life insurance to help ease the burden for those we leave behind.
“Most of us will have a basic level of understanding of what life insurance can do for our family, but few people really understand the differences between term insurance and assurance.
“Life assurance has an important place as part of your protection planning. It can provide tax-efficient inheritance planning cover for your family, helping to pay off the inheritance tax burden on your estate and leaving them with more of your wealth.
“We all have different needs. By talking to an independent financial adviser, you can ensure that your cover is tailored to your needs and your budget. We can sit down with you to discuss how much cover you need and the kinds of cover that will provide all-round financial security.”
Some providers will also allow you to cash in a life assurance policy early, for policies which include an element of investment. However, the penalty charges tend to be substantial so if you take this option you may end up with less than you paid in.
Getting value for money is vital when you are looking for insurance cover, and at Continuum we can search the market to get the cover that is the most suitable for you and your family.
But there are other ways to keep costs under control. You can tailor your cover by only arranging term insurance to the period when it will be most needed, which may be your key working years, when you have children at home, or to coincide with the date you plan to pay off the mortgage.
But remember – the younger you are when you take out your cover, the less it may cost.
Insurers work by actuarial tables and as a young individual, you may be statistically less likely to die. At Continuum we can show you how you can potentially save money by starting young.
Term cover can be arranged for example, to increase in line with inflation, to decrease in line with the amount outstanding on your mortgage or to cover you both as a couple rather than as individuals – and there are many more variations.