Given the uncertainty of the times in which we find ourselves, sound wealth planning is more important than ever. In this second Wealth Insight, we explore the uses of life insurance particularly in relation to estate planning.
Covid-19 has significantly raised awareness among the wealthy about their mortality risk and enquiries for life insurance have remained strong. Interestingly, and contrary to most peoples’ expectations, premiums have not risen dramatically.
However, risk appetite among insurers and reinsurers inevitably shrank during the height of the crisis and capacity was reduced, with cover postponed on riskier lives. One broker tells us that his firm has recently seen available levels of cover (which are driven by reinsurance capacity) increase somewhat, although they are still below pre-Covid levels.
One particular use of life insurance is in protecting estates from the effects of Inheritance Tax (‘IHT’). A life policy can be secured on the life of a testator to cover the potential IHT bill on their estate. The policy is written in trust to ensure that the proceeds are free from IHT.
On death, the personal representatives claim on the policy and use the funds to pay the IHT due. They do not have to wait for the Grant of Probate, and they do not have to sell estate assets, or borrow against them, in order to fund the tax. Consequently, the succession process is speeded up significantly and assets can be passed to the beneficiaries intact and unencumbered by tax liabilities.
One point worth making here is that life insurance can be secured on joint lives. Transfers between husband and wife are exempt from IHT, whether transfers take place during life or on death.
So, where spouses determine that assets should be transferred to the surviving spouse on first death, no IHT will be payable on those assets until the death of the survivor. Insurance can be taken out on a joint life second death basis to fund the IHT due on second death, with a consequent reduction in premiums as there are two lives assured rather than one, therefore lowering the risk that the insurance company is taking on.
Further to the All-Party Parliamentary Group review of IHT published in January this year, which we referred to in our previous Wealth Insight, practitioners have also seen an increase in demand for cover on lifetime gifts as clients divest themselves of cash and assets in an attempt to pre-empt any law change.
Here a policy can be secured on the life of the donor to cover the potential IHT on the gift should they not survive seven years from the date of the gift itself, this survivorship being required for a Potentially Exempt Transfer (‘PET’) to become fully exempt.
Tapering relief (where the IHT on PETs is reduced gradually between three and seven years from the date of the gift) can also be factored in by corresponding reductions in the sum assured during the policy term.
On a related point, with the potential for a rise in Capital Gains Tax (‘CGT’) rates, we are also seeing assets with inherent gains being gifted in order to lock in the current, relatively low, CGT rates.
Figures from the Association of British Insurers show that 7,000 death claims during the height of the crisis stated Covid-19 as the cause of death. £90m was paid out in claims as, apparently, insurers are reacting efficiently and sympathetically to claim requests.
In considering life insurance, it is important to find a broker who will research best in market; coordinate the application and underwriting process; and in due time will ensure claims are processed as soon as possible after a death certificate has been issued. A solicitor, who can advise on and draft suitable trusts within which policies should be held, should also be sought.
The market is open, and the benefits of life insurance have never been more apparent.