Using life cover to reduce IHT liability

Posted on: 25 March 2008 by Gareth Hargreaves

Keep your life insurance, no matter how secure you feel.

life insuranceIt pays to keep your life insurance, no matter how financially secure you feel.

We all know that your commitments and responsibilities are far different now to those you had in your thirties. With the kids out the door, finally supporting themselves, and the mortgage paid you could be forgiven for being suspicious about why you could still have a need for life insurance.

There are still a number of roles life insurance can play in the protection portfolios of older people. A key area for this market is the provisions of funds to meet an inheritance tax (IHT) liability. If you have not already done so and you are in this age group, then we strongly recommend that you start thinking about inheritance tax planning. Excluding assets left to a spouse, assets passing to other individuals which exceed £255,000 (2003/04) would be liable to IHT at 40% on the excess.

In this situation, a ‘whole of life’ contract written in trust can provide an IHT free lump sum to ensure that, on death, your beneficiaries will be in a position to pay what could amount to an extremely large IHT bill. You can, of course, make gifts to your children or grandchildren during your lifetime.

But if death occurs within 7 years of the transfer, this will still carry a potential liability for any gifts that exceed the normal annual exemptions available. Policies are available that cover the potential tax liability on such gifts.

IHT is chargeable in two circumstances - on death and on a transfer of capital. If the policy is not written in trust, the insurance payout will increase the inheritance tax liability rather than pay it. This is because any insurance payout made without a trust arrangement would go straight into your estate, where it would be taxable under Inland Revenue rules. However, if the policy is under trust, it will not be treated as part of your estate.

The role of life insurance for the over-50s does not end at IHT planning. There are an increasing number of second marriages, and the decision to delay starting a family means that more and more children are being born to older parents.

If this is similar to your situation, it may be wise to make provision for short-term expenses while your children are still financially dependent on you. Family income benefit insurance could be used to cover any regular payments, such as school fees or university costs.

You might also require life insurance to ensure that any outstanding debts, such as personal loans or credit cards, are repaid on your death to prevent debts being passed to loved ones.

Various plans are available that address this market. Typically, most plans aimed at the 50-something market require no medical underwriting and acceptance for many of them is guaranteed.

For financial advice visit: Miles Financial Management

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