Inheritance Tax (IHT) is a tax on the estate (the property, investments, money, and possessions) of a deceased individual. How much you pay depends on the value of your estate.
IHT is affecting more people than ever. However, with careful tax planning, you can preserve more of your estate, without compromising your financial security. Whilst there are many options that can be used to tax help mitigate a potential IHT charge, this article is going to focus on one option – Whole of life insurance.
How much tax do I pay?
Your estate will owe at 40% on any value, after reliefs, above the £325,000 threshold when you die. That being said, your estate can also benefit from the Residential Nil-Rate Band provided your main residence is being passed to a direct descendant or the partner of a lineal descendant.
The Residential Nil-Rate Band is currently £175,000 for the 2020/21 tax year and will then increase in line with inflation each year. The Residential Nil-Rate Band is reduced for estates over £2 million, reducing by £1 for every £2 that the estate is over £2 million. This effectively means that if your estate is valued at less than £2 million, you will only pay IHT if your estate is worth more than £500,000. As this is per individual, a married couple could have a total exemption of £1 million.
What is whole of life insurance?
Whole-of-life insurance is a type of life insurance policy which ensures that, no matter when you die, your loved ones will receive a lump sum payout from your insurer. This is in contrast to term life insurance, which only guarantees that there will be a payout should you die within the specified term of the policy.
Who is whole-of-life insurance suitable for?
One of the big selling points for whole-of-life insurance is that it can help your family deal with an inheritance tax bill. A common misconception is that beneficiaries assume they can use the deceased estate to cover the tax bill. However, any inheritance tax will need to be paid before your loved ones will be given access to the estate which can put your family in a difficult position.
As a result, many are forced to take out a loan just to cover this bill, which can be an added source of stress at an already upsetting time. A whole-of-life insurance policy can help avoid this issue. The payout provides the funds needed to clear the inheritance tax bill without loved ones needing to take out a loan or dig into their own savings. It is important to note that this is reliant on the policy being written in trust.
How much does whole-of-life insurance cost?
Whole-of-life insurance is generally a more expensive form of life cover than term life insurance for the simple reason that insurers know they will definitely have to pay out some money at some point. You must ensure that you can afford the premiums, not only during your working life but also once you retire. If you fail to keep up with your premiums, the cover will be cancelled.
The actual cost of your whole-of-life insurance policy will be come down to a wide range of factors about you, such as how much cover you want, your age, your health and your lifestyle. The table below outlines the approximate premiums for a sum assured of £200,000 of cover for various ages.
|Policy owner age||Term||Sum Assured||Monthly Premium|
|40||Whole of Life||£200,000||£185|
|50||Whole of Life||£200,000||£262|
|60||Whole of Life||£200,000||£389|
|70||Whole of Life||£200,000||£627|
Please note that the premiums quoted above a based on a non-smoker, with no negative health or lifestyle factors. In addition, the rates offered by insurance companies change on a regular basis, so these premiums are for illustrative purposed only.
When should I take out the cover?
You can see from the table above that the cost of the premiums increases as you become older and this is simply a reflection of the increased risk to the insurance company. Therefore, in order to keep the cost of the premiums lower, it is sensible to take out the policy when you are young, fit and healthy.