Final bonus on life insurance policy

aroominyork

I am reviewing my father’s finances (my sister has PoA but I am now assisting) and have a valuation of a Prudential life insurance policy. It shows holdings in two investment funds whose total is the same as the sum show as “Current fund value without final bonus”. However there is also a figure which is 45% higher shows as “Current fund value with any final bonus payable”. Could someone please explain the difference between these and whether it is certain which amount will be paid when my father passes?

Old_Lifer

A final bonus  is payable on a  with-profits policy and  is paid on a claim arising under the policy.    With a whole life policy it is payable on death,  with an endowment  it is payable at the end of the term or on death within the term.  

The  rate of  final bonus payable depends on the length of time the policy has been in force  within the with profits fund.   The  longer  a policy has been in  force ,  the higher will be the rate of final bonus.    Rates of terminal bonus will vary between different types of policy.

The final bonus is not guaranteed.   The policy documentation will usually say something like   'we may pay a terminal bonus'.  Rates of terminal bonus can be altered  at any time   but most  providers  set new rates at the year end and apply these early in the coming year.   The same rate may be in force for many months and sometimes for the whole of the year.

As said above,  final bonuses are not guaranteed  and can go up or down in the short term.  

If a policy is terminated  early by being  surrendered,    the  surrender value of the current final bonus would be included  in the  surrender value of the policy

aroominyork

Thank you for that answer. I do not know whether it is a whole life policy or an endowment though I suspect the former. I can check, but is there any clue in the current valuation saying it is a “Prudence Bond / Prudence Managed Investment Bond Mk4 (Initial Charge)”?  Among the valuation is a section saying “Next payment due: 01 October 2009” – would that be when the last premium was paid?

 

I have a number of questions about tax on the policy which I would appreciate help with.

1)            When the policy is paid (assuming on my father’s death) is inheritance tax payable on the full amount paid out? (His estate will be liable for inheritance tax.)

2)            The valuation shows a large amount under “Total withdrawals paid to date”. My sister says she has been advised that an amount can be withdrawn each year tax free (the amount equates to just under 5% of the ‘current fund value with any final bonus payable’) and she has been doing so for the last few years, but other amounts have clearly been withdrawn as well (I am not suggestion anything improper  – I am just trying to understand the tax implications as one of the father’s residuary beneficiaries). This link says, at the foot of the page, “tax on such withdrawals is only paid at the end of the policy.” Does that means that 40% IHT will be payable on death on the full amount of all withdrawals?

3)            If the final bonus payable is 45% (which it calculates to – does that look likely?) has that 45% bonus been forgone on the withdrawals made? My concern is that if say £100,000 was made in withdrawals, instead of a final payout of say £290,000 (£200,000 plus £90,000 bonus) on which IHT would be payable leaving £174,000, the policy would pay £145,000 (£100,000 plus £45,000 bonus) on which IHT would be payable with the £100,000 withdrawn sitting in another account on which IHT would also be payable leaving £147,000. That would mean a net loss of £27,000 (ie 60% of the £45,000 lost bonus).

Old_Lifer

I  have no experience  of more recent products, in particular the Prudence Bond you mention.   My experience dates to the 1980's.

Although I am tempted to answer your question regarding the tax position ,  this may have changed  since my day  so others with current experience are better placed to answer that aspect.

Nearlyold

 This might help  - https://www.pru.co.uk/pdf/INVS0002.pdf

aroominyork

On a separate question, does a co-executor of an estate have a right to see the Will while the person whose Will it is (the co-executor's parent) is still alive? (You might guess that I am embroiled in a messy family situation.) 

dunstonh

The executor is appointed on death and not before.  They have no right to see the Will until they are appointed as one of the executors.