Life Term Insurance against IHT

planforfuture

I am looking for information on what kind of life term insurance are suitable for an inheritor to pay off a part of IHT they are inherting.

For example if I am leaving my estate to my son after I am gone, I want to make sure that with the life term insurance, he will not need to pay a very high IHT on the estate he is inheriting. 

Also, is the life term insurance payout subjectef to any tax.

dunstonh

I am looking for information on what kind of life term insurance are suitable for an inheritor to pay off a part of IHT they are inherting.

Typically you would use a decreasing term assurance if you are covering a PET.  Or a whole of life assurance if not.  You would not use a term assurance if its not a PET (in most cases).

Also, is the life term insurance payout subjectef to any tax.

Life assurance is not taxable in most cases.  There are some exceptions in some scenarios.

Assuming that the estate is over £1 million, the exempt level that most people have nowadays, this would suggest there is a fair bit more than that (if it was only just over, then most people wouldn't bother).   If this is made up of investments, then have any trusts been used for the investments?    Or are there any defined contribution pensions? (nearly always outside of the estate).

planforfuture

Thanks for the info. Please explain what is PET.

Yes, already  realised my defined contribution pension is exempt from IHT. 

westy22

PET - Potentially Exempt Transfer (i.e. transfers subject to 7 year survival)

planforfuture

Now that defined contribution pension will be included in the IHT estate. Even with PET taken into account, there will still be a large number of IHT after i am gone. Please advice what kind of whle life term insurance are suitable to negate the IHT the inheritor will be facing. 

Is setting up a trust also a viable option bear in mind the inheritor is already over 18 years old anyway. 

Thanks in advance for your help.

poseidon1

planforfuture said:

Now that defined contribution pension will be included in the IHT estate. Even with PET taken into account, there will still be a large number of IHT after i am gone. Please advice what kind of whle life term insurance are suitable to negate the IHT the inheritor will be facing. 

Is setting up a trust also a viable option bear in mind the inheritor is already over 18 years old anyway. 

Thanks in advance for your help.

Suspected you might be back with that question after realising your DC pension pot is now up for grabs for IHT purposes.

You previously estimated a £300k IHT liabilty on the joint estate of you and your wife. Presumably this has increased somewhat when adding  in DC pension scheme?

If you want funds going direct to  your son whenever death occurs, then it will definitely be a joint life, whole of life cover , payable on 2nd death of you or spouse. To ensure the policy proceeds do not further aggravate your IHT exposure, it must be written in trust for your son, with your son appointed as an additional trustee.

This type of policy will be expensive, so rather than looking to cover the entire iht exposure, you may probably restrict cover to a level you feel you can comfortably afford.

Choice will be between guranteed whole of life ( fixed premiums but very expensive) or unit linked (more affordable but premium could rise substantially at the 5 or 10 year review). See below article from Aviva briefly covering these aspects

https://connect.avivab2b.co.uk/adviser/articles/tech-centre/protection-planning/personal-protection/life-assurance-for-inheritance-tax-planning/

Would suggest you consult an IFA ( rather than an FA) to explore your various options and costs thereof.

planforfuture

Thanks for the prompt reply.  Yes, to include the DC pension back into the IHT estate plus growth in other investments, IHT is now over 1m. 

So giving gifts in the form of PET in coming years (and get a max 7 years term life policy to cover that) may help to reduce the whole life premium a little i suppose. 

May also consider to convert a portion of my DC pension into a pension annuity instead.

Don't envisage any future government in control will reverse the DC pension decision right as it's a very profitable way to milk cows 🙄