Tax free life insurance or 55% tax?
TAKING care of the pennies so the pounds took care of themselves was a discipline I’m sure most mothers knocked slowly into each of our heads. My mother was no different.
On a regular basis, I run the cost of my life insurance through a comparison to ensure I’m paying the least for my cover that I should be, or that I am maximising the cover for the premium I’m paying.
Most households have their mortgage and cost of living insured against, but disturbingly, 8.5 million breadwinners in the UK have no life insurance at all leaving the UK under insured by £263bn.
I can’t imagine the desperation of a family having lost a loved one and breadwinner who can’t afford to pay off their mortgage and are then faced with repossession and eviction.
Life insurance dates back as far as 100BC when Roman soldiers put money into a pot to pool risk to protect surviving families in the event of death. It took a few wrong turns with the unscrupulous insuring someone they had no relationship with, and then strangely claiming on their plan after their untimely death. This was altered only as far back as 1774 when you had to prove an insurable interest. Nice move.
Insurance is essential for both the business and the individual and protecting the family assets is vital.
For the individual, take the time out to review your life cover. Is it enough? Are you paying too much for the insurance plan you have, or are you maximising the cover for the premium you are paying?
A few months back, I mentioned these costs, showing that a family with two 45-year-old parents would receive £244,000 cover with the top company, and just £200,000 with number nine on the very long list of insurance providers. For a simple telephone call to your independent financial adviser, that extra £44,000 could be essential.
Similarly we found many individuals within companies who were badly over paying on life insurance by not taking advantage of a generous tax break.
A ‘relevant life policy’ is a highly tax advantageous way to be insured. The company pays the individuals insurance premiums and the benefits are paid to the individual’s own trust.
As such, the employee has not paid tax or National Insurance on that premium and the company hasn’t paid National Insurance either. Tax free life cover.
Furthermore, the employer receives full tax relief on the premium as a business expense.
Because the death benefits of the plan are paid into a trust, the money is received speedily and free of all inheritance tax. In fact, it is tax free.
For added flexibility, the employee could take the life insurance with them to the next company and ask them to meet those premiums. Not all companies offer that flexibility of course, so your independent financial adviser will guide you through that.
Costs, as always are interesting and once again your adviser will be able to guide you through it. There are very few companies offering the above relevant life policy and a quote in front of me right now shows the significant cost competitiveness.
For £1.25m cover, the most competitive premium is £100.68 for a 53-year-old, and number seven on the list is £144.80. Or, put another way, you could use the extra £44 to buy over half a million extra cover.
This insurance is not to be mixed up with death in service benefits. These schemes typically pay out three to four times your earnings and have been very popular.
However, the benefits are paid into the deceased pension fund and could easily be clobbered with a 55 per cent tax charge if over the pension lifetime allowance. The current standard allowance is just £1,030,000 so you can see how easy it is to breach.
Whilst relevant life requires underwriting on an individual basis, a relevant life policy is far superior in that any benefits are paid directly into the employee’s tax free trust, rather than a pension.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you would like your life insurance reviewed please call Darren McKeever on 028 6863 2692, email email@example.com or visit www.wwfp.net.