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Life Insurance

Protecting Your Estate

One of the biggest problems about inheritance is the amount of tax that could be payable on someone's estate. For example, if you have an estate worth over a certain specified amount when you die, then it may be liable to Inheritance Tax.

Inheritance Tax - payable before the estate moneys can be released

The irony is that Inheritance Tax must be paid before the value of the estate can be released to the beneficiaries. In other words, your loved ones can't claim what's due to them under your will, and then pay the Inheritance Tax out of what they've received; they must pay Inheritance Tax up front, before the value of the estate is released to them.

This might mean that they have to take out a loan to pay the Inheritance Tax owed - which is all the more ironic when your money may simply be sitting there waiting to be released, with sufficient available to pay Inheritance Tax on your relatives' behalf.

Life insurance - a tax free way to pay Inheritance Tax

That's why many people take out a life insurance policy which will pay out on their death and so cover the cost of any Inheritance Tax due on their estate. The plan should be set up under a trust, so that it does not form part of the deceased's estate for inheritance tax purposes. What's more, the proceeds of the policy are paid free of tax.

What kind of policy is required?

For IHT planning, (all life policies should be written in trust to avoid the life policy proceeds exacerbating the size of your estate). In the case of a married couple, a whole life insurance policy is taken out in joint names and payable only after the last person has died. In the case of a single person, a whole life insurance policy is taken out in their name alone. The insurance plan is set up as a trust, with the beneficiaries usually being the children and other family members of the deceased.

Protecting lifetime gifts

Sometimes, people try to reduce or eliminate Inheritance Tax liability by decreasing the size and value of their estate whilst they're alive. They usually do this by making gifts to family members - and these are tax-free as long as the donor survives for seven years after making the gift.

Of course, there is always the risk that the donor may die within the seven-year period, so the donor will often take out a life insurance policy to cover the cost of the tax payable, should they die within that period. The type of insurance is known as a gifts inter vivos policy and runs for seven years. The policy is set up in trust to ensure that the funds fall outside the donor's estate for tax purposes. The beneficiaries are normally the heirs to the estate.