How you can save money using 2 Insurances
This article explores how you can save thousands by simply having two whole life insurance plans rather than one.
When a person takes out life insurance for inheritance tax purposes, the default mechanism is a "Joint Life Second Death Whole of Life" plan.
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Joint Life Second Death Whole of Life Insurance
A Joint Life Second Death Whole Life Insurance policy is set up to pay on second death because inheritance tax is payable when the second person dies. So, this is not like purchasing a term life insurance policy for a set time period like a term life policy to cover your mortgage.
Joint Life Insurance is usually set up in such a way that it pays off when the first person dies during the life of the policy. It does work to settle the inheritance tax as it ensures the money is available to pay the tax when the second insured person dies. However, you will find that these plans are quite expensive.
Once we came across a client who was paying about £600 per month into a Standard type whole of life policy while he was 52. Going at this rate for another 35 years or so could have cost him £252,000 over 35 years.
There are much better mechanisms available for you, such as using two plans, rather than one where you can save money.
The two types of plan are standard plans and maximum plans.
Standard Plan or Balanced Plan
A standard plan may be used to insure your retained assets, such as your main residence. Your home is not generally given away as you probably intend to remain living in it. If you did try and give it away while continuing living in it, this would cause tax problems for your children.
Other retained assets could be your car, furniture, some antiques, or any other asset you want to retain.
There are other assets, such as emergency funds. If your income stream matched or exceeded your expenditure, you would still need to keep a certain amount of money that you could get access to as your emergency fund.
Now the calculation for this type of cover must be done properly. You've got to look at those assets both for their current worth and how much it will likely grow over 20 - 30 years. Therefore, you've got to have an increasing value insurance plan in which the amount of coverage increases over time. Therefore, the premium will also increase over time. This requires a comprehensive calculation to get correct.
The other type of plan is called a Maximum plan which is set up differently to a standard or a balanced plan. The main reason to set up this plan is to cover your temporary assets. Assets that you intend to give away either directly or into trust such as shares, funds, property, etc.
If your income matches your expenditure, and if you've maintained a reasonable emergency fund, you may be able to start giving away some of your assets. Now, this could be done by directly giving them away to your children or else indirectly to trust, etc. Both methods allow you to take them out of your estate over time. This may take you anything from five years to 15 years to twenty years, and therefore you have to set up a maximum plan to cover you in case you both die during that period.
Let's see how these two types of plans work for you. First, let's have a look at the difference between a Standard Plan and a Maximum Plan.
Standard/ Balanced Plan
The premium of a standard plan consists of three key elements,
- Charges (Depends on the company)
- Life Cover
Let's say you're trying to insure yourself and your retained assets will be worth a couple of million in 20 years of the time when you die. So you need to start with around £500,000 of cover. So, your properties and other assets are starting at £500,000, but it's going to grow, and therefore you need an increasing cover over time. Your premium will also increase over time.
So, as you've got this life cover, what happens with the investment? Over time the investment will grow with the stock market. Let's say it rounds up to about £800,000 depending on health and so many other things. The company would expect that investment to meet the value of the cover. The value of the plan will pay the expected IHT liability on the second death.
So, what happens if you both die early?
If you die early, your children will get the value of your investment at that point, and they will also get the top up with the amount of insurance. Therefore, whatever the value is at that particular time hopefully covers your inheritance tax liability for those assets.
This is expensive because of the investment element. Imagine that you're trying to save up £500,000 over 20 years. You will have to put over £1000 pounds or £2000 pounds a month, depending on the figures. Therefore, these policies are expensive and that's why you need to implement this system of two plans.
A Maximum plan consists of two key elements with Life Cover being nearly the whole value of the plan with a smaller portion of charges. The costly investment element has taken out.
Your cover will increase over time, your premium will also increase over time, but now you've got no investment. What happens here is the increasing premium goes up annually and every ten years it takes a massive jump.
Over time this monthly premium could double or triple and then in another ten years, it could quadruple again which leads to the point that it becomes unsustainable. Because in 20 years you will be paying about £10,000 pounds a month. However, you've covered yourself during a particular period by giving yourself time to gift away the assets from your estate in other methods such as putting them into trust, downsizing your property & give away some of the excess capital, etc.
Therefore, this maximum plan gives you time but at a much lower cost. Let's just say that you are 60 years of age and, you may be paying £800 a month with a standard plan whereas you may only be paying £80 a month with a maximum plan. That's is a huge difference.
Once you have given assets away and the 7-year rule has been applied, you can reduce or stop your maximum plan
Therefore, that timescale and this methodology save a considerable amount of money.
The other thing that you've got to watch out for is the charges. If your adviser takes a commission on a plan, that commission could be thousands of pounds, which we don't think is quite right as it will raise your monthly premiums considerably. So instead we charge a fee based on the plan, the risks, and the liability of advice. This is a flat fee with a very small additional cost depending on whether it's a £2 million policy or a £1 million policy.
Generally, the savings, because you pay an upfront fee, is huge. Sometimes we've saved clients between £10,000 - £15,000 in terms of differences in the premiums over the terms of the policy.
Setting up these two types of plans together makes sense since most people want to retain some assets.
The differences in the cost per month are huge and with the second plan in place, it gives you time and the ability to give away your assets in a different format.
Lastly, like all inheritance tax advice experienced advice is essential. Please call us for a free consultation if you need and help.
As a bonus, book a free Zoom call consultation with Charles de Lastic, MD of Bluebond Tax Planning today.