Financial Planner Chris Taylor explains how life insurance can allow you to provide a legacy for your family.
“No legacy is so rich as honesty.”
You could be forgiven for thinking that your worldly assets (or your ‘estate’) will be enough to provide a legacy for your loved ones, but with average UK life expectancies fast approaching 90 years(1) and average nursing home costs for those who need it now reaching £46,436 p.a.(2), there is a very real risk that your children’s inheritance will be eroded during your lifetime.
So, what part can life insurance play? For many of us, insurance is associated with covering something specific such as an asset, mortgage, tax liability or an income. These life policies will usually have a fixed term until they expire or need to be renewed. A Whole of Life (WOL) policy, however, is exactly what it says on the tin – a life insurance policy that will remain in force for the rest of your life (provided that you continue to pay the premiums) and pays out the sum assured when you die. Such policies have historically been used to cover things such as funeral expenses, although there are actually very few restrictions on the level of cover one can arrange.
Well what sort of features do Whole of Life policies offer? Firstly, you can decide if you want the policy to cover just you, or you and your partner. A ‘joint life, second death’ policy will be owned jointly and will only pay out once you have both passed away, so it will be less expensive than the alternative ‘first death’ policy. You can also choose to ‘guarantee’ the premiums for the policy. This is often more expensive at the outset, but it ensures that no matter how long you live and regardless of any changes to your health, the cost of your insurance will never change. A WOL can also be index-linked, meaning that the sum assured will be linked to some measure of inflation to ensure that the real value of the money is not eroded over time (although in this case, your premiums will go up slightly each year to reflect the increases in the level of cover).
Let’s use an example: Paul and Sam are 60 years old and want to arrange for their grandchild, Jack, to receive £50,000 when they die. They take out a Whole of Life policy on a joint life, second death basis for £85.65 p.m.(3) If Paul and Sam had decided to instead save this money, it would take them 48 years before they had saved £50,000 (they’d be 108!). Looking at it another way, if they were both to die say, at age 90, then the sum assured on the WOL would be greater than the premiums paid by nearly £20,000. Paul and Sam could also place the WOL policy in trust, meaning that the sum assured will be paid out quickly and directly to Jack without the need for (or cost of) probate. This would also place the proceeds outside of their estate for Inheritance Tax purposes.
There are plenty of other benefits to such a life policy, including that you don’t need to rely on investment returns and the fact that the sum assured will be tax-free in most circumstances. Not least of all, a Whole of Life policy can provide peace of mind and certainty for the plan holder, something that we have been in extremely short supply of recently. Nevertheless, before arranging any sort of policy (be that protection or investment) it’s important to carefully consider your objectives so as to ensure that you are arranging the right type of plan for you and your loved ones.
I wonder what William Shakespeare would have thought…
Chris Taylor BA(Hons) DipPFS
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Information is based on our current understanding of taxation, legislation, and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The scenario included is for information purposes / general guidance only and should not be interpreted as an advised recommendation.
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 Care Homes for Older People, UK Market Report – Laing Buisson, December 2019
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