The following guest post is by Mark Meldon – our favourite independent financial advisor (in an admittedly narrow field!) Now and then we persuade Mark to explain some of the more obscure or technical corners of personal finance.
I believe it’s worth us returning to the topic of life assurance – one of the essential matters that Monevator readers need to consider on a regular basis.
There seems to be some mass incoherence amongst the general population when it comes to confronting our mortality.
People – willfully or otherwise – forget that we all dangle by a very thin thread.
The result is that taking out insurance to protect dependants by creating a tax-free pool of money to replace lost income is an option simply ignored by millions of us.
Many independent financial advisors (IFAs) don’t bother with insurance either, as they say it isn’t profitable.
That’s crazy – and irresponsible – in my view.
All of your sexy investment and pension plans can soon turn to dust should disaster strike. For the sake of paying very modest premiums – for something I sincerely hope you never need to use – you can cover off that risk.
You hope they don’t pay
On a more positive note, there is plenty of money going out to beneficiaries who’d surely back up what I’m saying.
In 2017, Aviva paid out £525m in death claims, Legal & General £636m, Royal London £517m and Zurich Assurance £235m. AEGON recently stated it paid out £67m in 2018.
These companies are some of the largest providers of life cover in the UK, but others are available in what is a fiercely competitive market.
It’s also interesting to note that policies arranged through an intermediary such as an IFA tend to have a much larger sums assured. I’d hope this is because careful thought has gone into the amount required by a given individual, as opposed to a scattergun approach.
I am, however, concerned that something like 85% of life insurance policies arranged each year are not set up properly at outset. This can cause severe difficulties in many circumstances.
It is all to do with ‘writing’ the policy into a trust. The recent deferral by the government of proposed big increases in probate fees set me thinking more about this.
The suggestion of an increased liability for IFAs like me for failing to take reasonable steps to ensure that life policies are protected from probate is of serious concern to me, my family – and my professional indemnity insurers.
Let’s hope that the ambulance chasers don’t get involved.
Unmarried couples beware!
Mind you, with average life policy sums insured still far below £200,000, inheritance tax is unlikely to be a big problem for most people.
But something else really could be.
Let us say that you took out a life policy with a sum assured of £250,000 because you have just become a parent. Imagine your partner did exactly the same.
Sensible. You bought the policy with every good intention, either online or, perhaps, through an IFA. You’ve been paying your premiums ever since.
Job done!
Or is it?
Like many couples nowadays let’s say you’re not married but rather cohabit a house with your growing family. Sadly, you then die.
How would you feel if, on your deathbed, you realised that your soon-to-be-bereaved partner for whom the life cover was intended stood to get nothing at all – a 100% loss, of typically around £150,000?
This doesn’t happen because your policy provider declined the claim. Rather it happens because your policy wasn’t set up properly.
Well I’m afraid that this is what can easily happen to unmarried couples, because the sum insured would fall back into your estate and be subject to your will or the laws of intestacy.
It could then end up in the hands of the wrong people who might – just might – refuse to hand the money over to the person you intended it for.
Yikes!
Use a trust
Until a few years ago this was a very small problem. Most life policies arranged by new parents – or those with joint liabilities such as mortgage payments or the rent – were joint life policies.
These joint life policies paid out to the survivor after the first death.
Besides, even if a single life policy had been arranged most couples back then would have been married and the laws of intestacy – or their will, assuming that had one – would have likely saved the day.
So much for yesterday – what about today?
Anecdotally, something like 70% of life policies arranged nowadays are arranged on a single life basis. There may be good reasons for this. But it presents a big problem for the growing number of unmarried couples who just don’t understand how important it is to set their policies up correctly.
The solution is to write the policy into a trust AND make sure that there is at least one trustee – hopefully the partner for whom you bought the policy in the first place.
Prepare properly for the unthinkable
The proportion of couples that are unmarried continues to increase. The highest share is among the age groups who already have small children, and who are first-time buyers or renters.
According to the Office for National Statistics, nearly 40% of unmarried couples have a male partner aged 30-34. Some 70% of children are born with a father aged between 25-39.
Yet research from Unbiased found in 2017 that 72% of 35-54-year olds don’t have a will!
Even if you have a will – and you really must – don’t forget that it can be challenged. And it still has to go through probate and, perhaps, inheritance tax calculations.
According to the recent British Social Attitudes Survey, approximately 50% of couples wrongly believe that there is such a thing as a common law marriage. There is no such thing!
Hence, I find it almost unbelievable that only around 7% of life policies are set up wrapped in a trust when, in truth, nearly all should be.
Case study: Second time around
It is quite common, nowadays, for relationships to be very different from our grandparents’ time because of marriage or cohabiting breakdowns, and these often involve children.
Indeed I have just been dealing with a situation where simple life insurance has been employed to solve a tricky problem as a new relationship beds down.
It is all about ‘financial input’ – cold-blooded as that phrase is – and unforeseen consequences.
One of my clients, let’s call him John, is a lovely chap. Sadly, John’s first wife died ten years ago at a young age, leaving him with two small children to raise on his own. His late wife carried substantial life insurance, and there were generous pension benefits, too. John has raised a fine pair of young adults who, I’m sure, will go on to lead successful lives.
Time is a great healer. John is now closely involved with Jane and, I’m pleased to say they intend to marry next year.
Jane is divorced and has two younger children from her previous relationship. Because of their ages, there won’t be any new children. They each own houses – Jane’s with a mortgage – and they would now like to purchase a property together and set up a new family home.
Very fortunately, they are looking at properties around the £1m mark, as the life insurance that paid out 10 years ago has been invested and produced good returns.
Of this £1m budget, the input from John will be about £800,000, and from Jane £200,000. Quite understandably, they both wish to ensure that their own children receive their ‘due’ when they die, so they are arranging with their excellent solicitor to purchase the new property as tenants in common, with John initially owning 80% of the new home, and Jane 20%.
So far, so good.
However if one or the other of this couple should have the bad timing to die sooner rather than later, it creates a problem for the survivor as far as paying the kids’ inheritances are concerned.
Jane has not got £800,000 available to buy out John’s children’s financial ‘expectations’ and, although John would be able to dip into his funds to cover those of Jane’s children, he would prefer to avoid having to do so, as the money should pass to his own children.
I therefore suggested that John purchase £800,000 of life cover to age 70 (by which time they might be thinking of downsizing and so on) and Jane £200,000 on a similar basis.
These policies have been set up with John’s children as the ‘named beneficiaries’ on his policy and Jane’s children on hers. The insurance will be in a ‘flexible trust’ from the outset, with each other being appointed as trustees. We have also appointed another independent trustee who can act as ‘overseer’ should a claim unfortunately arise.
If John dies whilst the policy is in force, the £800,000 would be paid out, tax-free, to his trustees (Jane and the referee trustee), thus giving Jane the funds to ‘buy-out’ John’s children’s interests in the property. This would allow Jane the luxury of not having to sell the home to raise the funds to do so.
My couple felt that the monthly premiums of under £150 were a price worth paying for peace of mind, covering off something that they were both concerned about.
Avoiding problems with trusts
Not writing a life insurance policy in trust is pretty daft, I have to say, and that goes for new and existing policies.
I hope I have explained why, for the sake of a bit of thought, you really need to do this.
Happily, this problem is simple to avoid or deal with. Several of the insurers I mentioned earlier have put great effort into getting it done right at outset, with superb online trust documents. Even the ones still using paper-based documents have excellent trust wordings available free of charge.
My suggestion? Check your policies, set up a trust for your loved ones, and write a will. And if any of this seems difficult, ask an experienced and qualified IFA for help.
Mark Meldon is an Independent Financial Advisor based in Cheddar, Somerset. If you need an IFA closer to home, try the directory at Unbiased. You can also read Mark’s other articles on Monevator.
@MM “Check your policies, set up a trust for your loved ones, and write a will.”
To which I would personally add “set up LPAs with your spouse/partner/significant other”, to help that person to manage the situation should you lose the capacity to be involved. https://www.gov.uk/government/publications/make-a-lasting-power-of-attorney
£150 a MONTH? Yikes. Their choice obviously, but my preference, after my death, would be for my share of the property to remain in trust whilst my spouse continued living there, only passing to my children upon the second death.
Firstly – fully agree with the earlier comment about LPAs!
Secondly – The article makes the point about the importance of having a will several times – but what’s so bad with the laws of intestacy for a married couple with no business interests?
Timely article here as I have just been through this minefield. I cohabit with unmarried partner and we have a 3 month old baby.
So we got a really cheap AIG life insurance policy for £34 per month on £500k, pay out on first death for 20 years.
However, I really struggled to find info about trusts for joint life policies and whether it was actually needed for IHT purposes. I decided, on the sparse info I found, that it was indeed part of the dying partners estate and therefore subject to IHT. BUT… if you set up a trust for a joint life policy, then neither of the policy holders can be a beneficiary of the trust!! So effectively we would have to put the beneficiary as my 3 mth old baby!!! @theinvestor could you comment / confirm the above for me?
Worth noting that if children/beneficiaries are tax resident abroad, trusts will probably create more problems than they solve. Withdrawals from foreign trusts often have onerous tax paperwork obligations and are taxed as income, whereas the tax treatment for direct inheritances is much simpler and usually more favourable (often tax free). This is the case in the US, at least.
Everyone is right, I should have mentioned LPA’s (which I have done myself) – apologies!
@ Scott. £150 per month for £950,000 life cover isn’t so bad, really. These are middle-aged people, and costs rise as you age.
Situation I saw.
A Widower with substantial assets and 2 children, married a divorcee with 1 child and nothing.
No will. He died.
She wrote a will, left it all to her child and died.
Widower’s 2, now adult children, got absolutely nothing. Not even family stuff. There was a lot of hurt and bitterness
An interesting read that now has me thinking about my own circumstances (article goal achieved!).
Your arguments seem to be around non-married cohabiting couples, and a couple with non-standard requirements. Is this just as important for ‘traditional’ married couples (with the same children)?
You state “you really need to do this” which is quite a strong statement. Are there any cases where setting up a trust is not a good idea?
P.S. The above is not to be confrontational – I’m just interested 🙂
@Jonny.
Sure trusts should be used with life insurance for pretty much anyone; married couples, civil partners, ‘living together’. My tale was just an example.
The way I see it that no-one would rationally buy life insurance unless it was to provide for either a financial liability or to care for loved ones. You should state to whom the money should end up with if you were to die. A trust is surely the best way of doing that, and avoids delays whilst your affairs are settled, keeping the pay-out outside of your estate.
I do occasionally meet single people with life cover – they may have elderly parents to provide for, for instance – but, although there is an argument for buying a policy(ies) while you are young and fit and thus amazingly cheap to insure – it is a waste of money, really.
There are other things that could be mentioned, such as ‘life of another’ policies, but the article would be very dusty and lengthy. The Investor and I have to draw a line somewhere!
Slightly off topic but relevant to making a will.
@GI (3)
“…what’s so bad with the laws of intestacy for a married couple with no business interests?”
Should both parents die at once, and if you have children, an enormous risk of court-battles, family disputes and potentially even foster care.
Putting off the will-making process is a risky strategy which means that parents are ultimately playing Russian Roulette with their child’s future.
Hi. Assuming you’re primarily referring to who would assume guardianship, we have a written and signed statement giving my wife’s brother and his wife guardianship. They have a copy and there is one in our house too. https://childlawadvice.org.uk/information-pages/testamentary-guardianship/
@GI(11)
Apologies if I appeared to assume that you personally had not made provision for you’re own children.
But you’re question was “…what’s so bad with the laws of intestacy for a married couple with no business interests?”
No need for apologies! Perhaps I should have been clearer with my question. In essence I was trying to understand if there was some as yet uncovered issue that I needed to be aware of, which it would seem not.
@ GI – “….. what’s so bad with the laws of intestacy …..”
For info https://www.gov.uk/inherits-someone-dies-without-will
There are benefits from making a Will other than setting out the beneficiaries and their respective entitlements. For example:-
a) Guardianship of any minor children (as already mentioned but ensure that the nominated guardian(s) are in full agreement and have the full ability), and your wishes in respect of the child’s/children’s education;
b) Your wishes in respect of organ donation or non-donation;
c) Your wishes for your funeral arrangements and possibly for your burial location.
@GI the main issue with intestacy if you have children is that the surviving spouse only inherits the first £250k outright, any excess is then shared with children. That’s certainly not how I’d choose to arrange my affairs. Also, the last thing you want to be dealing with if your spouse has just died is any further complications regarding administering the estate.
Do IFAs ever include “get married “ in their financial advice as they seem to input to every other area of life(as they should)?
xxd09
@David & @xxdo9
There is no reason as to why an infant, or any child under the age of 18 can’t be made a beneficiary of a life insurance trust. With the rare exception of ‘statutory trusts’ (set up under The Married Women’s Property Act 1882 and rarely used nowadays), most life insurance trusts are discretionary. Trust deeds will have a long list of ‘potential beneficiaries’ and you would normally name beneficiaries, too. The trustees have discretion as to what to do with the money, should a claim arise, and, in this instance, would hold the money (in investments, perhaps) for the child until adulthood. Trustees should be chosen with great care (hint: the word starts with ‘trust’), and it is sensible to leave a ‘letter of wishes’ for them, too.
Remember, though, they have discretion. My life insurance policies are in trust for my wife and three kids and my wife is also a trustee, along with me. I have also appointed my solicitor as a ‘referee trustee’ and I trust him implicitly. Although two of my kids are in their 20s, they would benefit from professional help, as would my wife, should I die whilst the policies are in force. Should that unfortunately occur, my wife would know what to do with the money (pay the mortgage off, gifts to the kids, invest for income, etc.) but we agreed that it would be a great comfort to her to have the other trustee in the background to offer help and assistance.
I can think of at least 5-6 situations where I have recommended that clients get married (the impertinence!) for entirely unromantic reasons, mainly surrounding taxes, and they all have! A few years ago, I also recommended that two ladies – companions not lovers – undertake a civil partnership, too, as there was a potential very heavy inheritance tax bill should the senior of the two die. They were rather affronted when I did (‘what do you take us for?’) so I retired gracefully that day! Six months later, the civil partnership was done.
I suppose what I’m saying is that, used properly, life insurance (and, to an extent, critical illness insurance) can be a very useful financial planning tool, especially since nowadays its ‘pure protection’ and not muddled up with iffy investment funds, like endowments were, for example.
I happen to be the Treasurer of a local charity that makes financial grants to young people under the age of 25 for educational or vocational purposes; it’s a great thing to be involved in. Every six months, money is handed out. Amongst the last three ’rounds’ were four new widows in their 30s or 40s, and we helped with things like buying school uniform. None of the dead men had life insurance, and mortgages and other debt remain outstanding; very sad and sobering.
When I first took out a mortgage in the mid-80s, I had to ‘assign’ a life insurance policy to the lender – no life cover, no loan – after the building societies were deregulated by the Thatcher government and other banks were allowed to offer mortgages, the requirement for assigning life policies was quietly dropped – madness!
Really like these articles, nice compliment to the investment side.
That life assurance example is clever but wow at some cost! If it’s just two of them no mortgage that could easily constitute 5-10% of there total expenses? That’s some price for what amounts to avoiding a forced down size? But their choice and subjective of course.
@Factor #14.
By the time a will is read it is generally too late to address organ donation. Decisions need to be made in the minutes and hours after death. Register and tell your loved ones about your decision.
I think life assurance is fairly cheap. My partner and I both got 25 year policies when we were in our late 30s, written in trust, for 9bp of notional (so £75/month per £1mm). Life assurance was both the cheapest and cleanest way to hedge the risk that both of us got wiped out simultaneously, leaving the children with a large IHT issue. Other ways of avoiding IHT could cost multiples of that.
The example Mark gives is somewhat more expensive (19bp running) but I’m assuming that the individuals were somewhat older when they entered into the policies. Nonetheless, 19bp is not exactly punitive and it solves the issue very cleanly.
@PwF #19
Quite right, and hence the reason why my “loved ones” each have a copy of my Will and are fully aware of my wishes as set out inter alia therein.
Hi Mark, cracking post as always. Thank you for sharing.
I’ll confess that my single-life life insurance policy isn’t written in trust. But we’re married, have no kids (and don’t plan to) and aren’t planning to leave our money to anyone else. Am I perhaps missing something?
@ The Details Man,
Firstly, do you need life insurance? If your wife would miss your income to your marriage then probably ‘yes’. I would suggest that a life insurance discretionary trust would be sensible, as this would mean that the policy proceeds, were you to die, would not fall into your estate for IHT purposes and this would also help avoid probate delays, assuming that there are surviving trustees (your wife, for instance).
There are also other IHT planning opportunities. Briefly, something called ‘bypass planning’ might be helpful. This is where the policy proceeds are retained by the trustees in the trust fund, paying benefits to the survivor as and when they need them. I have had situations where, instead of just giving capital to the survivor(s), loans from the trust fund have been made instead. Doing this means that, instead of the value of the beneficiary’s estate being increased, a debt is created. This debt would only be payable on the beneficiary’s death, and this comes off the value of the eventual estate.
If your policy is with a ‘big’ life office, you will find that they have trust solutions for you – worth a look.
I need to revisit wills and that stuff. For some reason it never seems to get done. I do have one but it needs tweaking. I got some life assurance when my eldest lad came along. Bit like yfg though it’s not in trust. I’ve been wondering whether the rational thing is to ditch it if you’re FI? What are you insuring against in that instance? Not a lot? But I haven’t done so. Psychology?
On the cost by bp I can see that arg but think you should probably still look at absolute cost relative to all other insurance you hold and relative to your cash flows to make sure you’re not too far out of whack on one issue
@Mark Meldon, a very useful post.
In the example you gave the £1m life assurance policy funds a buy out in the interest in the property. Won’t the estate and the beneficiaries interest in the property be based on the market value of the property at the time of probate? What happens if the property is valued at £2m? Can life assurance policies be index linked, and if so for comparison what would the monthly cost have been for that example?
@Mark – thanks that’s some helpful information. For what it’s worth, it’s a decreasing life insurance policy to cover our mortgage. The wife is in gainful employment so she has death in service benefits, but I don’t. Which is why it’s a single life policy. My thoughts were that the lump sum payment for the mortgage would mean the mortgage expense would be less of a drag on the wife’s single income. Food for thought. I will need to revisit cover on remortgage as I’m likely over-insured given we’ve been making significant over-payments.
@JE
You are right, but a line had to be drawn somewhere. Indexation could have been added (at a cost). It was agreed that we would just ‘close off’ the initial financial ‘input’ to deal with what might be termed ‘legacy issues’, but, going forward a new relationship will grow and the ‘pot’ will eventually become joint. It’s just a simple example of where life policies can be at least of some help should disaster strike.
@The details man.
Requalify first and choose level cover, I’d say – she won’t send the excess money back to the life office after paying off the mortgage!
@Mark Meldon, yes that makes sense. How much would the premiums have increased from £150 pm for indexation?
@ JE,
Hard to say because, unless a fixed % escalation chosen at outset, I can’t predict, for example, RPI.
Mentioning RPI reminds me to talk about ‘Real Annuities’ sometime!
Great post thank you and two quick points.
If I am leaving nearly all my estate to my wife there is no inheritance tax to pay so (apart perhaps for ease of administration) does writing the assurance policy in Trust have any tax benefit?
Presumably for reasons of space you didn’t mention Family Income Benefit policies which can be fantastically good value for covering outgoing liabilities related particularly to children.
@Passive Investor,
I’m a great fan of Family Income Benefit and have written about this undervalued policy before; indeed, many of my clients with young dependants own FIB policies, and my wife and I do, too.
There is an advantage in writing your policy in trust, but it is a bit complicated. This is known as ‘bypass planning’. If your policy just paid the sum insured to your wife, after a fantastic funeral and a period of mourning, she ends up with all of the financial assets and this would thus increase the value of her eventual estate (well, probably) and this could create or exacerbate an IHT liability on her eventual death (of a broken heart, two years later!).
Alternatively, the policy proceeds could be retained in the trust fund, paying benefits to the survivor as and when they need them. Most discretionary trusts used with life policies give powers to the trustees to make loans to the beneficiary(ies). Making payments in this way would mean that instead of the value of the beneficiary’s estate being increased, a debt is created. Let’s look at how this might work, using a simple example kindly provided by Aviva.
Simon and Rachel are married and have two children, James and Charlotte. In January 2010 it was decided that they needed life insurance cover for £300,000. Each of them took out a term insurance policy for £300,000 over a 20 year term. Each policy is held under a discretionary trust. Simon died in 2015 and the Trustees distributed the fund in his discretionary trust to Rachel. On Simon’s death, all his assets passed to Rachel. Rachel died on 1 January 2016, with the value of her estate being £950,000. Her estate passes to her two children.
The inheritance tax payable:
On Simon’s death. No IHT is paid, as the benefits of the policy are held under trust, outside of his estate and his estate passes to hi wife Rachel.
On Rachel’s death. No IHT is payable on the proceeds of her policy as these are held in trust, outside of her estate.
Inheritance tax on Rachel’s estate;
£950,000 – £650,000 (her nil rate band (NRB) + 100% NRB transferred from spouse) x 40% = £120,000.
Benefits for the children;
From Simon’s policy trust – Nil, as all benefits were transferred to Rachel
From Rachel’s policy trust – £300,000
From Rachel’s estate – £830,000
Total – £1,130,000.
With bypass planning
This is the same as the scenario above except that the Trustees decide to loan, interest free, £300,000 of the trust fund to Rachel. On Rachel’s death, she owns assets worth £950,000.
Inheritance tax payable;
On Simon’s death. No IHT is paid, as the benefits of the policy are held under trust, outside of his estate and his estate passes to his wife.
On Rachel’s death. No IHT is payable on the proceeds of her policy as these are held in trust, outside of her estate.
Inheritance tax on Rachel’s estate;
Although Rachel has assets worth £950,000, her executors will be required to repay the loan of £300,000 to the Trustees of Simon’s discretionary trust. So the value of the estate for inheritance tax purposes is £650,000. So, the calculation is;
£650,000 – £650,000 (her nil rate band (NRB) + 100% NRB transferred from spouse) x 40% = NIL
Benefits for the children;
From Simon’s policy trust – £300,000 (the loan repayment)
From Rachel’s policy trust – £300,000
From Rachel’s estate – £650,000
Total amount received by the children – £1,250,000 (£120,000 more than without ‘bypass’ planning).
Also there are further benefits of using single life policies, where the benefits are retained within the trust in addition to the IHT benefit illustrated in the example above;
Where a client has had children from a previous marriage, they may wish to provide for the needs of their current spouse, whilst also protecting the interest of those children.
To alleviate concerns over the marriage or divorce of a beneficiary.
Where intended beneficiaries are too young to receive a lump sum.
To protect the interest of a vulnerable beneficiary, or one who is mentally incapable or has a special need.
To protect against the future bankruptcy of a beneficiary.
I hope that helps!
I’ve been looking into getting this set up, our current situation is as follows:
Not married but co-habiting – will try to fix this soon
No will – again on the To-Do list
Joint mortgage with 97k left and the 20% H2B Equity loan still to pay – hoping to pay this off in October next year which will be our 5th year in the house (bought for 155k)
2 months emergency fund
Currently have a 130k joint policy that would pay off the house and the equity loan
I have 4 years life assurance with work at my basic pay and income protection which pays 75% for 5 years, 7.5% fully matched pension (so 15% total)
My partner has none of this, has the basic workplace pension which she’s had since last year (started at 34 so has bugger all to retire on currently).
I have spoken to LifeSearch who advised the following but I’ve yet to pull the trigger
Additional 100k joint life insurance over 30 years
Joint FIB of 2k a month over 30 years
24k of term life insurance with critical or serious illness over 30 years each
And then income protection for my partner of £800 a month until 67 which includes fracture cover
This comes in at £92.43 for the additional services, it’s currently £11 for the existing policy meaning just over £100 all in.
Does this sound too much? We have no children and no plans to have any, a car on PCP and then no other debts. I am nervous that it’s a lot of money as we overpay the mortgage by £500 (essentially doubling it as our mortgage is 497) in order to roll in the equity loan on the house in 2021.
Not sure any of this is written into trust, would need to ask.
Thank you
It is pretty terrifying how these ingenious tweaks can save such vast sums
In a way, I wish I was like TI in as much as being an advocate for paying all the IHT you can, as it would bypass the need to think about any of this. One of the guys I work with is similar – but even more socialist, in not wanting to avoid any form of any taxation at all. Makes for an easy financial life!
But I’m not.
I’ve really got to find myself an IFA – tax planning is too complex to DIY (simple investing is right on the limit of my abilities, I know I’m making a few mistakes currently even with that!)
@jamie. I’ve never understood why people need life insurance if they don’t have children. To my mind life insurance is for people dependent on your income, and I don’t think my spouse is my dependent or vice versa. Insurance to pay off a joint mortgage yes, as that affects the home they live in. Otherwise no.
Then the main concern is income protection in the case of sickness or unemployment. I had income protection for many years, which I cancelled when I became FI. Otherwise we were depending on employer’s sick pay, and self insuring for any periods of unemployment (realistically never going to be an issue for me, only my spouse). Obviously, if one of us had been affected by a debilitating illness and unable to work, then life insurance for the remaining sole income would be more relevant. Again I had good death in service benefit so would never have actually been an issue for me.
There’s been a lot of discussion about how writing in trust speeds up payouts by bypassing probate delays. My father died recently with a number of insurance bonds written in trust. Despite this, we needed to show the probate certificate before they would pay out, so there was no advantage in terms of speed. We did save IHT, but given how they were invested, it’s probably a moot point as to whether the investments might have done better in low cost trackers even taking into account the IHT saving…
A fascinating and thought provoking article. Thank you for writing it. A further one on the use of trusts, including will trusts would be similarly interesting.
I had not thought about making a loan from a trust and thus creating a debt to be of any use before. Sounds a bit dubious and I am surprised the HMRC has not closed out potential misuse.
A question I have on the life assurance policies is whether a policy not written into trust can subsequently be amended to be written into trust. Or do you have to let the policy lapse and take out a new one?
Similarly can a trust be amended once established? Adding new trustees and/or beneficiaries for example.
@Jamie Brown,
Lifesearch are a highly reputable business and I’m quite sure that the ‘belt & braces’ portfolio of protection products will have been carefully sifted and I am confident that you would be wise to proceed.
@Naeclue,
Yes you can write an existing policy into trust and most life offices will have the right trust deed for you to do so. Although this is technically a chargeable lifetime transfer for IHT purposes, the value of your policy is likely to be nil, so there shouldn’t be any tax implications. Trustees can be replaced by having them complete and sign a deed of retirement and new ones can be put in place by using a deed of appointment. Same with beneficiaries, although, unless they are trustees too, they don’t need to sign anything.
As someone who tends to lean away from any non-compulsory insurances, I was pleasantly surprised to find out how much life insurance would cost me and subsequently took out a policy.
My situation: Married (aged 25 and 24), new home owners and no children. We save 50% of our household income per month.
My wants and needs for the policy: To cover the outstanding mortgage on the house, leave a little in the tank for funeral costs and to help broach the initial loss of income. The policy would be 25 years long to match the mortgage – we have little need for cover beyond that.
I appreciated the advice to go for a renewable policy but found that my ideal suitor came in the shape of a joint fixed term decreasing life insurance policy (with terminal illness included for free). I found £100k of initial cover to be ample when combined with our current/forecasted savings, workplace death in service benefits and pension forecasts.
All for £4.41 a month. I’m still in awe that it’s such a small amount. We will be set to pay just over £1,300 over the lifetime of the policy which I find to be astonishingly small for the value that is provided.
@Mark Meldon Thanks, that is very useful. I don’t hold life assurance, but know some people who do and at least one of them does not have the policy written in trust.
As you say, it is crazy not to. I don’t really understand why this would not be the default.
I need to ponder the IHT hedging aspects of life assurance a little more.
Is it possible to get a joint life policy payable on the 2nd death instead of the first? For IHT mitigation this strikes me as more appropriate.
@Naeclue,
Yes, but not many life offices would offer a joint life, second death term policy, with the exception of a ‘Gift inter vivos’ 7-year decreasing term (used to cover potentially exempt lifetime transfers).
As no-one can know when they will die, it is the case that (much more expensive) whole of life policies are most suitable to provide a pool of liquidity outside the estate to pay the IHT, thus ‘preserving’ the estate. It’s not perfect, but uncontestable (as the IHT gets paid) and can be binned if the rules change. Best taken out not too late, as becomes sooo expensive later on, assuming you can still qualify for a policy!