Life Assurance provides for my family upon my death. The trouble is that the taxwoman jumps in.
Avoiding the tax burden might be why people go for insurance rather than assurance.
For Term life insurance policies – I need to decide how much cover and pick a term (length of time for the cover to run).
- Level cover – is where the pay-out on death remains the same over the term of the policy;
- Decreasing cover – is where the pay-out on death reduces in line with a debt, such as a mortgage;
- Increasing cover – is where the pay-out increases either with the rate of inflation, or by a set amount every year.
It only pays out on death during the term – so if death doesn’t happen, all the money spent on the insurance is gone. Luckily I do not have pre-existing medical conditions, which make premiums expensive, but I am over 50.
There is something called Over-50s life insurance – these are plans that promise a fixed lump sum on death. The problem with this, as far as I can tell looking around online, is that I would probably have to make monthly payments for the rest of my life.So the longer I live, the more it costs. Not only that, but it is possible that the pay-out on death would be less than the amount paid in premiums. There are also quite onerous cancellation charges – and if a single monthly payment is missed for whatever reason, I would probably not get a pay-out at all!
On the other hand, I understand that there are plans that link the pay-out with inflation, and other over-50 plans that only require premiums until I reach a certain age. These tend to be more costly, though.
Is there a way to avoid the tax burden but steer clear of insurance policies?
Yes, life assurance pay-outs are subject to inheritance tax (IHT) because they form part of the estate upon death….unless the life assurance policy is placed in trust.
Putting a policy in trust also helps beneficiaries avoid probate – meaning they can get hold of the pay-out without a lengthy legal process. That a winner right there.
I am thinking now that I need Life Assurance in Trust to cover the cost of my funeral and to provide for my family without a tax burden upon my death.
This is what I need to look at next.