Term Life or Whole Life Insurance to offset IHT

planforfuture

Hello,

I am over 60 (retiring this summer) and am thinking of setting up a Term Life or Whole Life Insurance policy with the aim to provide a sum for my child to pay off the IHT for my estate after I am gone.
My estate total value will definitely exceed the IHT allowance as per today's value. I am not sure which life policy (i.e. Term Life or Whole Life) I should consider and if it's better to a joint life cover with my wife or better individual (it may cost more). And what the pros and cons between these life insurances.

Am I right that with Whole Life, it can be setup as a trust hence the payout to the recipient is tax free. Is it the same applies to Term Life?

Your help will be much appreciated.

Sandtree

Term can be setup in trust too.

If you are 60 now and say get a 15 year term policy why would you not have an inheritance tax issue when you are 76? 

What are your plans if you die before your wife? Does she inherit the lot and therefore its exempt from IHT anyway?

Is there a particular reason for wanting insurance to cover the IHT rather than investing what could be sizeable premiums instead and so increasing the estate size? Obviously in theory the average person is worse off having insurance. It can be more appropriate if the estate is predominately illiquid assets and therefore would create the need of undesired disposals to pay the tax.

Weighty1

Traditionally the way of writing an insurance plan to cover IHT is a Whole of Life, joint life 2nd death plan as the IHT liabilty only arises upon the death of the 2nd spouse.  That said, there is more than 1 way to skin a cat.  The big risk of using a term assurance plan is that if you are still alive at the end of the policy term you'd better either still be in good health, mitigated the IHT liability somehow OR become happy that the government are going to take a large chunk of the estate potentially.

Arranging a WOL joint life 2nd death option is the only insurance way of guaranteeing you've mitigated that risk fully (providing your estate doesn't increase in value)

planforfuture

Let's assume someone's estate is mainly property (I.e. prime residence) and stocks & equities., Is Life  WOL joint life 2nd death option the best option forward?

Sandtree

planforfuture said:

Let's assume someone's estate is mainly property (I.e. prime residence) and stocks & equities., Is Life  WOL joint life 2nd death option the best option forward?

Best option is to speak to an advisor about inheritance tax planning who can advise factoring all your motivations for wanting to do this and your beneficiaries.

Its certainly one way of doing it but only works if the first life will be leaving most/all the estate to the surviving spouse. Premiums will be substantial, particularly if you want to fix them for the duration of the policy rather than having them escalate as you get older. If your stocks and equities are sizeable you may find further investment rather than insurance is a better option 

dunstonh

It has been donkey's years since I last used a life assurance for estate planning.  In most cases alternative methods without the need to buy a life assurance are possible.   The very last WOL policy I did was a non-investment backed single premium plan as the sum assured was a lot more than the single premium.  Still, quite an unusual case as they fitted a sweet spot that made single premium better than monthly premium.

The changes to the pension wrapper, joint allowances, alternative tax wrappers to ISA, use of trusts etc and a bit of planning can often avoid the need.   Pensions probably have been a major influence as you can divert income draw from less tax-efficient wrappers (like ISA) and not draw as much from the pension (obviously it tends to depend on whether you have a DB or DC pension and other assets).  Gifting over your lifetime is very misunderstood by people.

Keep_pedalling

planforfuture said:

Let's assume someone's estate is mainly property (I.e. prime residence) and stocks & equities., Is Life  WOL joint life 2nd death option the best option forward?

What sort of split? If you have sufficient equities to reduce your IHT liabilities by gifting, then you can cover any IHT resulting from an early death through what will be a fairly cheap term insurance just to cover the 7 years from making a substantial gift.

Just checking, have you taken into account the RNRB exemptions which will push your joint exemptions to £1M?

Weighty1

planforfuture said:

Let's assume someone's estate is mainly property (I.e. prime residence) and stocks & equities., Is Life  WOL joint life 2nd death option the best option forward?

Is that property your residence?  There is additional IHT relief available for the passing of a property down the blood line BUT I'm not totally au fait on it.  As Sandtree mentioned thhe best course of action is speaking to an adviser who specialises in estate planning.  A joint life 2nd death WOL plan will work but as Dunstonh mentions there are often alternatives which won't involve paying a significant monthly premium.