Choosing Term Assurance Over Whole-of-Life Insurance

One of the biggest mistakes is opting for term assurance instead of whole-of-life insurance. Term assurance policies are set for a specific period, often until the policyholder reaches a certain age, such as 80. The uncertainty of lifespan means that term assurance may expire before the policyholder passes away, leaving their estate with a tax liability. In contrast, whole-of-life insurance guarantees a pay- out upon death, providing a more reliable solution. For married couples, a joint - life second death policy is advisable since inheritance tax is payable after both have passed away.

Relying Solely on Whole-of-Life Insurance

While whole-of-life insurance can be effective, relying on a single policy can be limiting. Many people overlook other methods of reducing their estate's taxable value, such as gifting, placing money into trusts, or investing in business relief plans. A comprehensive strategy should include these options alongside whole-of-life insurance. Typically, a standard whole-of-life policy covers the main residence and an additional amount, while a second policy (a maximum plan)covers assets intended for gifting. It's crucial to plan ahead and decide which assets to keep or give away, and then determine the necessary insurance.

Miscalculating Future Tax Liabilities

Another common mistake is not accurately estimating the tax payable based on probable longevity and asset growth. Different assets appreciate at different rates, and while cash may grow slowly, property values might increase at 3-4% annually. Assuming a longer lifespan, such as living until 95, can help provide a cautious estimate. Considering these factors helps in calculating the potential tax liability more accurately.

Skipping Professional Advice

Some individuals bypass advisors and go directly to insurance companies, thinking they can save on fees. However, insurance companies treat the direct approach as if an advisor were involved, retaining the commission themselves. This means paying for advice that wasn't received. On the other hand, some advisors take commission instead of charging a fixed fee, which can be costly for high-premium policies. At Blue Bomb Tax Planning, we charge a fixed fee, ensuring better value for our clients.

Using Insurance Company Trusts

Often, advisors recommend using the free trusts provided by insurance companies. However, these trusts typically need to be wound down within two years of death, which can be problematic if inheritance tax planning results in lower liabilities than expected. Excess funds in the trust can end up in the heirs' estates, potentially being lost in divorce settlements. Instead, we recommend solicitor-written discretionary trusts, which offer better protection for the remaining assets.

DIY Inheritance Tax Planning

Attempting to navigate inheritance tax planning without professional help is a significant error. Effective planning requires coordinated legal, tax, accountancy, and financial advice. These experts must work together to create a detailed and effective plan.

In conclusion, while life insurance can be a part of inheritance tax planning, it's not a standalone solution. A comprehensive approach that includes various strategies to remove assets from the estate is essential. This ensures the preservation of family wealth, not just the payment of inheritance tax.

If you found this information useful, please reach out for more help with your insurance and inheritance tax problem.