Many people take out reviewable whole of life insurance policies to cover the cost of Inheritance Tax on their estates on death.
These policies are generally inexpensive at the start and therefore appear as an affordable solution, to the problem of how to pay the Inheritance Tax charge on an estate. However this often changes 10 years into the plan, as the cost of these policies generally get reviewed after the first 10 years, and then every five years after that. It is very common for the premium figures to increase dramatically during these reviews with a consequent cut in cover or a combination of increased premium costs and decreased levels of cover.
An example of this was reported in the press earlier this year when Sun Life of Canada conducted its reviews and as a result, some policyholders had their sum assured cut by 75%.
Pros and Cons
Some voices in the industry have argued that the public find these policies confusing because, being whole of life policies, customers think that they are covered for life without realizing the potential for steep hikes in the premiums of decreases in the amount of cover. Often these policies contain an investment element and are therefore trying to offer the client both protection cover and investment opportunity. However, most people take out the maximum amount of cover and therefore very little of the premium goes to build the investment. This leads to the benefit from the investment being minimal when the policy is reviewed and as a result, the premium rates escalate dramatically.
Mitigating Inheritance Tax is a complex area of financial planning and often involves the use of trusts and gifting rules. Within the context of an overall Inheritance Tax financial plan, whole of life insurance policies can certainly play a useful role however, their limitations need to be clearly understood and carefully managed and it is strongly recommended that you seek the advice of a qualified professional before entering into any such arrangement.
Should you require help on this we would refer you to a separate firm of independent financial advisers