It’s pretty obvious that the main advantage of having a life insurance policy is that upon your death, your loved ones are provided for financially.
If you’re working, that’s even more important because your partner won’t have your income coming into the household. And let’s face it, the costs of raising a family increases year on year.
For a child born in 2016, parents can expect to spend £231,843.
It’s not cheap, so naturally, the key benefit you get with life insurance is the assurance that your loved ones are financially provided for.
That is of course, provided you take care when arranging your cover to ensure they do have adequate protection to cover debts, funeral expenses and money left over to take care of their future(s).
With that in mind, here are…
6 of the top positives to life insurance that most overlook
- IHT planning
It’s only natural that you want your estate to be left to your loved ones and not be swallowed up by a huge Tax Bill for Inheritance Tax from HMRC.
Should your entire estate be worth in excess of £325,000, IHT will be payable. As such, it pays to plan carefully (while you can) to help steer your family clear of tax bills upon payment of your life insurance policy, and the execution of your will.
Also worth noting is that for married couples, should the threshold not be reached on the death of the first person, the joint threshold of £650,000 will apply on the death of the second partner. Therefore, should the estate pass to a husband or wife, and then be left to family, a joint threshold of £650,000 would apply to the death of the second person, which could see a higher than expected IHT bill due to finances paid out from the first death insurance pay out.
The first £325,000 of your estate left to loved ones is tax free. Go over that and there will be 40% inheritance tax to pay. For a single person with an estate valued at £500,000, that would leave £175,000 taxable assets, for which you’re loved ones would be taxed 40% on at a cost of £70,000.
That’s a lot of money to go to the taxman, therefore if you feel your estate is going to be valued above the threshold, you do need to plan for inheritance tax or your family will be left with a sizeable bill.
So long as you have a whole-term life insurance policy and know the cash value that will be added to your estate, you can forward plan with a financial advisor to get your tax affairs in order and minimise the amount of inheritance tax your family would be liable for.
- Mortgage Protection
Without a separate life insurance policy that you set up independently for your family’s future upon your death, you’ll find that any lenders will want you to take out a life insurance protection policy alongside your mortgage. There are two types of these. Level term does not change over the term of the policy. This type is ideal for interest only mortgages when the value of the loan remains the same.
The other type of policy is decreasing term cover. This will decrease your pay out the longer you pay into it because it’s only designed to cover the outstanding balance of your mortgage. Upon the death of the policy holder, the insurance beneficiary would be the financial institution for which they’d receive the payment in full for your home.
Upon execution of your will, your homes ownership can transfer to whoever you nominate and the home will be paid for under the decreasing term life insurance policy. These are your cheapest option and the reason for this is because they only pay the outstanding balance of your home and do not have any cash value. Your mortgage is paid for and that’s it.
If you want your insurance policy pay out to go further for your family, you need to an independent policy, although a decreasing term policy alongside your mortgage can ensure your family keep more of your policies pay out money.
Remember, there are no limits on the amount of life insurance policies or types you take out. Just remember they will only pay while premiums are maintained.
Should you still have a mortgage a decreasing term policy attached to it can save your family having to dip into the money left to them from any other policies to cover the outstanding payments on the mortgage.
- They can be investments with tax advantages too
If you’re looking to maximise your tax efficiency, there’s also life assurance policies. These aren’t the same as insurance though.
With life insurance, you’re protected in the event of your death. If your policy is term life insurance, you’re only insured if you die during the fixed term period.
Life assurance is a definite because you’re not insuring in case you die; you’re assuring that your family gets a pay out when you die.
In other words, life insurance is if you die within a fixed period if it’s a term life policy, whereas assurance, since death is a certainty, you’re financially protecting your family for when you die. Not if.
The difference with life assurance is that it can be an investment product. That’s provided the policy meets the qualifying criteria.
As with any investment, you do need to take professional advice, in particular when you’re looking to invest in life assurance policies, rather than life insurance because you will need to ensure the product you invest in meets the specifications to qualify for tax relief.
Approached correctly, life insurance can be beneficial while you’re living and even more so when you’re gone. Most take the approach of only using these policies to cover their loved ones in the event of their death, which is what they are designed for.
However, you can get advantages while you’re alive. You just need to know what you’re after, what’s available in the insurance market and how to go about investing for tax advantages today, while minimising IHT when you do die.
- You’re insured for the future
Nobody ever knows what’s around the corner. If you’re healthy just now, this is the time to insure yourself because the most affordable policies are for healthy individuals, non-smokers and preferably moderate consumers of alcohol, if not tee-total. In other words, if you pay attention to your diet, keep yourself in shape and look after your health, you’ll get favourable quotes from life insurance providers.
The advantage to doing this now is that if you do develop any conditions later, you’re already covered. Following a diagnosis of any health condition, you’ll usually need to find a specialist provider, agree to exclusions usually meaning that if your death is linked to a pre-existing condition, the insurance policy won’t pay out.
When you invest early into a life insurance policy, you’re essentially protecting your insurability in the future.
- Charitable tax-free donations
There’s many a person who have charities close to their hearts. Whether it’s the SPCA, McMillan Nurses, or Cancer Research, it is possible to leave some of your proceeds to the charity of your choice and they’ll receive the cash as a tax-free payment.
You don’t need to name a charity as a primary beneficiary. You can opt to include them in your will so that when your will is executed, the money you know you’re insured for is divided in the way you intend it to be used. This way, if you’re someone who does regular events and your charity will be losing financially when you’re gone, you can leave them some proceeds through your will.
- Business Survival
If you run your own business, there’s likely to be a temporary cash flow problem upon your demise. Your life insurance policy could be the survival life line your company needs to see it through a cash flow crisis.
On the other hand, provided you have planned an exit strategy to sell your firm to provide further cash to your loved ones, they can use the proceeds from your life insurance policy to fund a sale of the business, perhaps bringing aboard specialist expertise to raise your companies profile and get maximum profit from the sale