Life insurance and inheritance

JMCF81

Hi,
My partner and I jointly hold a mortgage and have a separate joint life insurance policy with each other as the policy benefactor.

We have 2 children each from previous marriages.

If one of us dies, the life insurance amount is to cover paying off the remainder of the mortgage, and to allow the other to "buy out" the deceased person's children (50%) of  the property (e.g inheritance)

How and does this work in practice ? 
What would the tax implications be?

Do we need to write this into a will?

Is there a better way to do it, to ensure both the surviving partner is taken care off, but the children also receive their inheritance upon the death of their parent? 

Any advice before we head to a FA and/or solicitor would be great.

Thanks 

Flugelhorn

One thought would be to leave the property to each other and make the children the beneficiaries of the life assurance policy. Would that work?

Mark_d

So you have two children.  You partner has two children.  You and your partner jointly have the house with mortgage and you have a joint life insurance policy?

If you were to die I presume your partner would have the house, being a joint owner?  Mortgage responsibility would fall to your partner - but this would be paid by life insurance.

How would you like things to work of for your kids and your partner's kids if you were to die?  I'm unclear on what you say above.

poseidon1

JMCF81 said:

Hi,
My partner and I jointly hold a mortgage and have a separate joint life insurance policy with each other as the policy benefactor.

We have 2 children each from previous marriages.

If one of us dies, the life insurance amount is to cover paying off the remainder of the mortgage, and to allow the other to "buy out" the deceased person's children (50%) of  the property (e.g inheritance)

How and does this work in practice ? 
What would the tax implications be?

Do we need to write this into a will?

Is there a better way to do it, to ensure both the surviving partner is taken care off, but the children also receive their inheritance upon the death of their parent? 

Any advice before we head to a FA and/or solicitor would be great.

Thanks 

Classic blended family scenario. So just to clarify:

1) Mortgaged property held jointly as tenants in common?

2) Wills are in place that leave each of your 50% property shares to your own children?

3) Joint life, first death policies in place which will generate sufficient cash to pay off mortgage and provide surviving spouse with funds to buy out the children of the deceased spouse.

The joint life policy, will pay out straight to the survivor without probate so no intial problem achieving the outcome in 3) above if death occurs during policy term.

However I have a question, is  the policy for a specific term covering the mortgage period only?

If term cover only, what is the plan of action when cover ceases and mortgage is paid off in the normal way? If you leave shares of property outright to children, how would surviving spouse raise cash for a buyout at that point?

Can I suggest when visiting a lawyer about your wills you raise the subject of IPDI trusts in each Will ( Google the term if unfamiliar), which would safeguard occupation rights of the survivor whilst still earmarking shares in the property for each group of children.

Finally, are your joint assets large enough for IHT to be an issue?  Life assurance can play a role if this is an issue, but things can get complicated if wealth between you is unequal.

EDIT

Assumed children on each side are all adults. If not further complications if any are minors

Keep_pedalling

What is your marital status? Is your life police written in trust? 

JMCF81

Flugelhorn said:

One thought would be to leave the property to each other and make the children the beneficiaries of the life assurance policy. Would that work?

The life insurance needs to go to the surviving partner so they can pay the mortgage off (neither of us can afford it on a single salary) the house would then be outright owned by the surviving partner. However, they'd need to "pass on" 50% of the value to the deceased's children in the form of inheritance.

JMCF81

poseidon1 said:

JMCF81 said:

Hi,
My partner and I jointly hold a mortgage and have a separate joint life insurance policy with each other as the policy benefactor.

We have 2 children each from previous marriages.

If one of us dies, the life insurance amount is to cover paying off the remainder of the mortgage, and to allow the other to "buy out" the deceased person's children (50%) of  the property (e.g inheritance)

How and does this work in practice ? 
What would the tax implications be?

Do we need to write this into a will?

Is there a better way to do it, to ensure both the surviving partner is taken care off, but the children also receive their inheritance upon the death of their parent? 

Any advice before we head to a FA and/or solicitor would be great.

Thanks 

Classic blended family scenario. So just to clarify:

1) Mortgaged property held jointly as tenants in common?

2) Wills are in place that leave each of your 50% property shares to your own children?

3) Joint life, first death policies in place which will generate sufficient cash to pay off mortgage and provide surviving spouse with funds to buy out the children of the deceased spouse.

The joint life policy, will pay out straight to the survivor without probate so no intial problem achieving the outcome in 3) above if death occurs during policy term.

However I have a question, is  the policy for a specific term covering the mortgage period only?

If term cover only, what is the plan of action when cover ceases and mortgage is paid off in the normal way? If you leave shares of property outright to children, how would surviving spouse raise cash for a buyout at that point?

Can I suggest when visiting a lawyer about your wills you raise the subject of IPDI trusts in each Will ( Google the term if unfamiliar), which would safeguard occupation rights of the survivor whilst still earmarking shares in the property for each group of children.

Finally, are your joint assets large enough for IHT to be an issue?  Life assurance can play a role if this is an issue, but things can get complicated if wealth between you is unequal.

EDIT

Assumed children on each side are all adults. If not further complications if any are minors

1) I believe we are joint tenants and we have equal shares in the property. 

2) We haven't written wills yet, this is the plan, where we want each of our 50% of equity at point of death to pass to our respective children. My children are adults and both love in the property. My partners children are under 18 and live with their mum.

3) The life insurance is a cash pay out to the survivor currently set at enough to cover the outstanding mortgage, some extra for expenses and to buy out the deceased children. It is not linked to the mortgage term. 

We did it this way as the surviving partner would not be able to manage the mortgage alone without causing some hardship and certainly would not be able to remortgage to buy out the children. 

The house is worth over 500k and we own 75%. With pensions and other assets and the fact we are unmarried (not my doing !!) I realise there may be IHT implications.

However, if the life insurance pays out to my partner and he pays out my children from that money, what are the tax implications ? 
Thanks 

JMCF81

Keep_pedalling said:

What is your marital status? Is your life police written in trust? 

We aren't married, that's my partners choice not mine. He's refusing to marry even for tax purposes. We are both divorced.
Our life insurance is not written in trust, we are just straight forward benefactors if one of us dies, the other receives a payout of a set amount. The life insurance is due for renewal in December which is why we want to seek advice and make sure we are setting everything up properly and writing wills. We are 44 and 45.

TELLIT01

I was about to say that as joint tenants the surviving partner would automatically inherit the 'other' half of the property.  As you are not married or in a civil partnership that isn't the case.  You really need to speak to a solicitor specialising in inheritance law.  Otherwise it has the potential to get very messy with two sets of children involved.

JMCF81

TELLIT01 said:

I was about to say that as joint tenants the surviving partner would automatically inherit the 'other' half of the property.  As you are not married or in a civil partnership that isn't the case.  You really need to speak to a solicitor specialising in inheritance law.  Otherwise it has the potential to get very messy with two sets of children involved.

Yes, we know the other half automatically inherits the property share. As partners we've agreed that's why we want the life insurance policy, to pay off the mortagage for the surviving partner to give them some financial freedom, but also so we can give the respective children of the deceased partner a payment out in lieu of property inheritance. 
Once the children of the deceased receive the pay out (using the lofe insurance money, which we want to some how incorporate into the will), they will have no further claim over the property or anything. There is no trust issues between my partner and I that either ine of us wouldn't pay out the children they're share.

Keep_pedalling

JMCF81 said:

Keep_pedalling said:

What is your marital status? Is your life police written in trust? 

We aren't married, that's my partners choice not mine. He's refusing to marry even for tax purposes. We are both divorced.
Our life insurance is not written in trust, we are just straight forward benefactors if one of us dies, the other receives a payout of a set amount. The life insurance is due for renewal in December which is why we want to seek advice and make sure we are setting everything up properly and writing wills. We are 44 and 45.

In which case your insurance needs writing in trust to prevent it being subject to IHT. You should increase the amount insured to cover a potencial IHT liability if either of you have assets exceeding £325k. 

When you make your wills you should include a clause that sets up an immediate post death interest trust which will protect your children’s inheritance and allow the surviving partner to continue to live in your home. This would also require change ownership to tenants in common.