Life insurance

Providing protection against the unforeseen and reducing the risk of losing assets is, for many individuals, a top priority

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.

Benefits

It provides guaranteed liquidity.
Benefits are tax free and paid before probate when placed in a suitable trust.
Premiums and benefits are guaranteed and so insulated against market fluctuations.
In a world of planning fatigue, it is a long term, inexpensive and straightforward solution.

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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:

Where is life insurance useful

Inheritance Tax (IHT) Protection
Life insurance can help to mitigate IHT exposure, which may exist in any of the following scenarios:

IHT is payable at 40% on assets above a nil-rate-band of GBP 325,000 or GBP 650,000 for a couple

It is payable by UK domiciled and deemed domiciled individuals on worldwide assets and non-domiciled individuals on UK situs assets

IHT is due on all UK property regardless of any structure, even for non-UK resident individuals

Gifts are generally treated as potentially exempt transfers, but if the donor dies within seven years, the gift may be taxable

Where beneficiaries are young and/or gifting is not appropriate

Life insurance is often cheaper than IHT
Legacy Protection

Where estates contain substantial assets, such as family businesses and landed estates, equalisation between beneficiaries can be problematic. A life insurance policy can be gifted to one beneficiary, ensuring other assets remain in place and beneficiaries receive a cash benefit at the point of death.
Family Protection
Income Protection

Often families are dependent on a main earner’s income to sustain their quality of life. An Income Protection Plan creates a replacement income should the individual become incapacitated and unable to work.
Mortgage Protection
Business Protection
There are a range of products to support businesses:

Key man insurance helps a business remain on track when key employees are impacted

Shareholder or partnership protection provides liquidity for the deceased’s family to realise the value of their shares in the business or partnership

It likewise allows remaining shareholders to protect their position and potentially retain control of the business

Loan protection allows for loan repayment and personal guarantees to be met

Relevant life plans offer small companies tax efficient death-in-service protection plans
Divorce Protection

In the unfortunate event of a divorce, provision is often required for protecting maintenance payments. In addition, individuals who benefited from a husband and wife exemption for IHT may become exposed.

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.