Life insurance

Protecting your wealth for your family

Life insurance is a simple, effective and transparent instrument which can protect against many uncertain events, yet wealthy individuals often disregard life insurance, reasoning they have wealth to cover any eventuality.

However, often assets are tied up in property or investments, and there is a limited source of liquidity. When income is high, often spending is too and the premature death of a main wage earner may have significant implications for the whole family. On death, the government retains 40% of an individual’s estate in Inheritance Tax, which is often more than is received by individual family members.

In each of these situations, life insurance can provide a valuable injection of capital and is effective at providing a solution to multiple issues. As an estate planning tool it can provide the cover for Inheritance Tax (IHT), leaving other assets in place to be passed on to the next generation.

It protects debts and businesses and when compared with traditional savings or investment products it can also offer sound returns.

Because many people prefer not to face their own mortality, life insurance may be difficult to consider. However, the risks of not addressing the subject can be considerable. There are a number of areas where life insurance can be used in wealth planning:

Whole of Life Insurance
An additional asset class

Whole of Life Assurance (WOL) is a solution which resonates with many of our clients due to its simplicity and value driven outcome. WOL can be summarised as follows:

• The purpose of a WOL plan is to provide a lump sum cash payment upon the death of the life or lives assured, whenever that might occur.
• These types of plans have no cash in value at any time and have no investment element to them. They are pure protection plans.
  
• Premiums, once medically underwritten, are guaranteed not to change unless the policy owner decides to increase or decrease the level of cover or if indexation is included as an option. This allows us to calculate the equivalent Internal Rate of Return (IRR) an investment would have to make in the markets to provide the same value to the deceased’s estate at a given point in time (age 90 is generally used given current life expectancies).
  

• If premiums are not maintained for the life of the policy, the policy will lapse meaning the cover ceases. No premiums are repaid and there is no cash in value at any time.
• The cash payment from the plan is typically used to cover UK Inheritance Tax (IHT) liabilities but the level of cover does not necessarily have to be contingent on an IHT liability existing. It is becoming more common for clients to use these products to provide liquidity to their beneficiaries as part of a well thought out wealth preservation and multi-generational wealth transfer plan.
  
• The specified level of insurance is paid to the beneficiaries on death of the life or last life assured, ordinarily via an appropriate Trust to safeguard against IHT.
  

Footnotes

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