The Covid-19 crisis continues to have a significant impact on the lives of everyday people. Within the financial services profession we have seen the demand for advice increase, not just over fears that taxes will need to rise to repay the escalating debt but a need to provide adequate protection for families after a loved one passes away.
Providing family members with a cash sum on death is often on the “to do list” but during 2020 as the pandemic progressed protection, for some people, moved to the forefront.
With the average cost of a funeral in 2019 being around £10,000 it can be difficult for those left behind to meet the cost, from the estate, especially if the estate consists of mainly illiquid assets such as the family home. It may be possible to obtain a loan from a bank but by providing life cover and placing this in a suitable trust an individual can make sure their family receives a cash sum quickly.
A whole of life policy is one of the simplest methods of ensuring that a cash sum is payable on death and arranging cover at an early age may mean that the premiums will be lower. For example, a male aged 53 could take out a whole of life policy (Flexible Life Plan) through Canada Life International with a sum assured of £25,000 for as little as £54.80 a month based on standard cover. For a male aged 63 the premium would increase to £81.38 a month. Whilst using a term assurance policy would be cheaper than a whole of life policy it is worth remembering that for the death benefit to be paid the life assured must die during the policy’s term.
Using a regular premium paying whole of life policy written under a suitable trust, is nothing new, it is straightforward and easy to understand, and arranging the cover when there is more potential for premiums to be lower means that the cost could be more manageable. Placing the policy in trust ensures that the deceased’s family can receive the cash sum before probate is obtained.
When a policy is placed in trust each premium paid is treated as a gift for inheritance tax purposes; however, this could potentially be covered by the normal expenditure out of income exemption. This overlooked exemption is a very useful when paying regular premiums as there is no seven year clock and it doesn’t disturb any other exemptions, such as the £3,000 annual exemption.
The normal expenditure out of income exemption is tailored to each individual and is available on gifts which are made out of surplus net income where the intention is for those gifts to be regular. Taking year on year the gift needs to form part of the individual’s normal expenditure leaving them with sufficient income to maintain their normal standard of living. However, your client needs to be aware that if their income changes – whether that is through a change of job, redundancy or retirement, not only could the affordability change, but the premiums might no longer qualify for the exemption.
Canada Life International’s Flexible Life Plan has many uses and can adapt to a client’s changing circumstances. Take for example our male aged 53 who by the age of 60 requires more life cover, he could potentially increase the level of cover at the next policy anniversary and pay any extra premium going forward. This can ensure that the policy continues to provide the best protection for families.
With lockdown restrictions beginning to lift in England peoples’ minds might be elsewhere but with concerns over a second wave there are still people that want to get their affairs in order.
For some couples the thought of not seeing each other meant that they moved in together as lockdown started. If the relationship has gone well those couples may now need to consider the legal implications of living together and this is where a professional adviser can help. Does the couple need to consider executing or up-dating their wills to ensure that their partner is protected in the unfortunate event of one of them dying? Remember there is a misconception that unmarried couples, living together, have rights.
Then there are the high net worth clients where getting their affairs in order means being able to pass their wealth on to the next generation in the most tax-efficient way. Recently the UK’s public debt became larger than the country’s economy and with opinions forecasting that this is expected to rise for the rest of the year what plans has the Chancellor got in store for the autumn budget?
2020 has seen people’s priorities change with more clients than ever wanting to protect loved ones from financial hardship and ensure that as much of their accumulate wealth passes to family members and not the treasury. If one thing this pandemic has shown us is that the help of a professional adviser is paramount to ensure that the best solution can be found for those new priorities and the younger people plan the more options become available.
Kim Jarvis
Technical Manager, Canada Life