Tax and Trusts
The payout from a life assurance policy is generally free of deductions for personal income tax. However, the payout is considered overall as part of the deceased’s estate.
If the payout, when added to the estate, pushes the entire estate over the threshold for paying no inheritance tax (known as the nil rate band), then any amount over the threshold would be liable for tax. In order to spare beneficiaries the burden of paying tax on a life insurance payout, policyholders can opt to write the policy in trust.
Placing the policy in trust ensures that the proceeds will not create or worsen a tax burden. They will also be available to the trustees to pay out to the beneficiaries almost immediately upon death, whereas if they form part of an estate they may be tied up in probate for several months.
A whole of life insurance policy can also be written under trust to be used for expected inheritance tax costs on the deceased’s estate to cover the tax burden. The policy in trust can be released to the beneficiaries almost immediately upon death, and they can then use it to pay the inheritance tax bill to release the estate. Placing a life assurance policy in trust is a complex issue, and people considering this option should always seek advice from their solicitor and independent financial adviser before proceeding. Existing Benefits You need to take into account what benefits you have in place already, especially from the NHS Scheme. We meet many prospective clients that are unaware of their existing levels of cover and have purchased too much life assurance as they thought they had a bigger ‘gap’ than they really have. As you get older it’s likely that your need for life assurance may reduce, especially if you set it up to provide for the family (children getting older, increased benefits from the NHS etc). Guaranteed or Reviewable? Where possible we always recommend that the premiums you pay to the life assurance company are guaranteed, which means that once the policy has started they will not increase your premium (apart from any inflationary increases) if they experience a rise in claims. If the plan is reviewable, the company has the right to increase your premium after 5 years, without increasing your level of cover.The ‘catch 22’ with this is that you may be inclined to shop around for cover again if this happens. The problem with this is that you will now be older (and be liable to pay higher rates) and your health may have deteriorated since the original application.
DB1
This does not exactly relate to life assurance policies, but you need to be aware of it if you’re in the NHS Pension Scheme.
As mentioned earlier in this guide, if you die whilst being a member of the NHS Pension Scheme your estate will receive 2 X your basic salary. So for a Consultant earning £80,000 pa this is a sizeable sum. The NHS will pay out the lump sum to your estate, not directly to your beneficiaries. If you’ve made a will they will receive the money faster than if there’s no will.
If you die without a will, known as dying intestate, the money may not go to those who you want it to.
The NHS has a form known as a DB1. This enables you to nominate who you want the money to go to on your death. You can even have the money paid into a trust which may save your next of kin inheritance tax.
Ask the NHS for a DB1 form, but make sure you take professional advice so you nominate the benefits to the right persons/trust.
Total Permanent Disability
If you buy (or already have) critical illness cover, this is an additional option that is automatically added to the plan. As an indicator, Norwich Union paid out 3% of its claims in 2003 for this benefit. If you’re totally and permanently disabled and unable to do your job, a suited job, or even any job then the lump sum you are covered for may pay out.
The crucial part to check is the definition of disability small print. Many plans have an any occupation definition, which means you’ll have to be unable to perform ANY job for the rest of your life. The own occupation definition is the preferred option (and won’t necessarily cost you any more money).
Action Point
If you have an existing policy(ies) you should check the small print as a priority. If you find that the plan can be improved speak to a specialist adviser who will be able to find you more appropriate cover.
In a few days, the last part of this series will look at how you can actually purchase life assurance.
