Life Assurance policies can be extremely useful tools to help with Inheritance Tax (IHT) planning. In general they are not used to avoid or reduce IHT liabilities but they are used to cover the cost of any IHT which does have to be paid.

Policies are normally written into Trust, so that the sum assured is paid into the Trust and does not form part of your Estate for Inheritance Tax purposes. Please note though, if the policy is not written into Trust the sum payable will form part of your Estate and will be liable for Inheritance Tax itself.

Planning and utilising Life Assurance in this way ensures that your family has available capital to hand to pay some or all of the IHT which may arise in the event of your death.

 

Two different types of Life Assurance plans tend to be used for slightly different purposes:

 Whole of Life Policies

 and

As the name implies, Whole of Life policies provide insurance cover for as long as you live. 

 
This type of policy can be taken out for an individual or as a joint plan to cover two people, typically a spouses or civil partners. In a joint plan the cover is usually provided on a "joint life second death" basis where no payment is made upon the death of the first person insured but full payment is made upon the death of the second party.

As the proceeds of this type of cover are normally designed to be used to pay off some or all of the final IHT liability (as opposed to cover for some fixed term liabilities – see below), the level of cover is often set at an estimate of what your eventual IHT liability is likely to be. Payment would be made to a suitable Trust so that it would not form part of your Estate.

Whole of Life policies are particularly suitable for those people who do not wish to give up access to their current capital or the future growth of that capital.

Policies of this kind offer benefits when used standalone but also offer increased benefits when used with other IHT reduction or avoidance schemes. For example they can be used in parallel with a Loan Scheme or Discounted Gift Trust where the income or withdrawals from these plans can be used to pay for the premiums of the Whole Life Plan.

In order to be accepted for a Whole of Life policy you will need to be in reasonably good health.

Premiums for Whole of Life policies can be paid monthly or annually or much less commonly by one off payment.

When premiums are paid monthly or annually, there are a number of different options for the level of premium payable:

Maximum Cover – where the premium paid to the insurance company is the minimum possible to provide the level of life cover required. As the cost of the provision of life cover is likely to rise over the years, this type of premium needs to be reviewed regularly to ensure that the level of cover required is still possible. It is likely that the premiums will need to be increased every five to ten years.

Balanced Cover – where a slightly higher premium is paid for a similar level of cover. The benefit of this approach is that the contributions build a buffer in the plan so that as the cost of the cover increases over the years the premiums need not increase and remain at the same level. It should be noted however that there would be no guarantee of this as it is dependent upon the financial performance of the insurance fund.

 

Guaranteed Premiums – where the premiums are guaranteed never to increase and the level of cover is guaranteed at the agreed level until your death. There are a few companies who will offer this type of policy.
  
We would of course work closely with you to discuss and explain the different aspects of each type of policy to ensure that you choose the right approach for your own particular circumstances.

Again as the name implies this type of policy provides insurance cover for a specified fixed term. They are particularly beneficial when you have a known fixed term IHT liability. This is often seven years, for example, when you have gifted an asset to someone and the gift is regarded as a Potentially Exempt Transfer (PET) for IHT purposes. (For more information on PETs see Allowances and Exemptions). The policy would provide funds to your family to pay any outstanding IHT on such gifts (PETs).

Some Term policies provide an option to convert a Term Policy into a Whole of Life policy at a later date should your circumstances change.

A number of Insurers offer policies which are specifically designed to provide cover for Potentially Exempt Transfers. These policies are called "Gift Inter Vivos" Plans (Latin for "Gifts between the Living").

In the same way as with Whole of Life Policies, in order to be accepted for a Term Assurance policy you will need to be in reasonably good health.   

 

 

If you would like to speak to an adviser about reducing your IHT liability or arrange a no commitment consultation then contact us on 0845 0532965 or alternatively please use the Contact Us form.