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Sunday, 01 December 2013
Paula Steele considers the use of insurance in wealth planning.

We all insure our cars, buildings and contents, take out travel insurance and even subscribe to roadside assistance programmes, but how many of us insure ourselves (or our clients)? Every wealth-planning advisor must ensure their client’s basic needs are met; this involves ensuring they have access to sufficient funds in an emergency, whether that’s if the boiler breaks or, more drastically, if they are unable to work for an extended period, suffer an accident or serious illness, or die prematurely. Of course, ensuring a client has enough wealth to cover these eventualities is ideal, but what to do before then?

Incorporating income-protection insurance (to pay a regular income while a client is unable to work due to a long-term illness), critical-illness insurance (to provide a lump sum to pay off debts or help with necessary home modifications in the event of a short-term serious illness, such as cancer) and life insurance (or, more accurately, death insurance – to pay off debts and replace lost potential income) should be considered even before wealth accumulation strategies come into the picture. Obviously, in the real world, when taking into consideration the client’s other objectives (such as wealth accumulation), there will often be a trade-off between the type and level of cover that is ideal and what is affordable.

Using insurance to fund IHT liabilities

Once wealth has been accumulated and there are no debts or protection needs, the use of insurance to fund potential inheritance tax (IHT) liabilities can be considered to ensure assets are passed intact and in full from one generation to another. This can be to cover the IHT on gifts, the period before an investment qualifies for business property relief (BPR) or agricultural property relief (APR), or the IHT payable on death. And, of course, insurance for this purpose should be held in an appropriate trust.

Insurance policies with combined investment elements (e.g. endowments) are generally no longer available.

For gift and short-term IHT planning, the best solution is often a simple term assurance policy, or a series of term assurance policies structured to mirror the reducing liability of any available taper relief. Bespoke gift inter vivos policies are also available, but over seven years will typically work out more expensive than a series of policies.

For estate IHT, a whole-of-life policy is the only option, as most term assurance and renewable-term assurance policies have maximum ages of 90 or less and convertible term assurance does not convert to anything at all attractive. There are two types of whole-of-life: guaranteed and non-guaranteed. With guaranteed whole-of-life policies the premiums are guaranteed for life, as is the sum assured. These are the most expensive option, but there are no surprises. Alternatively, a non-guaranteed whole-of-life policy may be more suitable and more flexible. This allows for a guaranteed sum for life, but at a fixed cost only for a short period (typically ten years initially). After a further ten years, five years or annually the cost is reviewed and (generally) increased in line with various factors – but not the client’s health. This is typically more appropriate where clients are younger (in their 50s or 60s) and intend to make alternative plans (e.g. gifting or spending) to reduce their IHT liability as they get older, as it gives them the certainty that they will have the cover if they need it, regardless of any health deterioration (albeit for an increasing price).

UK-based life assurance for non-UK residents

The one area with increasing demand, but unfortunately no corresponding increase in supply, is UK-based life assurance for non-UK residents who have a UK IHT liability on UK property. The UK insurers are setting their sights on UK-resident (and often domiciled) individuals. However, it’s worth asking around, whatever the need, whatever the client circumstances: an insurance product can probably be found.

Insurance or assurance

Today the terms ‘insurance’ and ‘assurance’ are largely interchangeable, but in the past ‘insurance’ was used where there was only a chance that an event would occur, whereas ‘assurance’ was used where an event would definitely occur. For example, a ‘level term insurance policy’ death would only possibly occur during the term, but a ‘whole of life assurance policy’ death would definitely occur during the term and there would definitely be a payout. When reviewing new or existing policies, these terms should not be relied on to ascertain the type of policy; the policy wording needs to be examined.

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Paula Steele

Paula Steele is Managing Partner at John Lamb.

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