Life
Insurance Quotes
The term ‘Life Insurance’
refers to an agreement between an insurance provider
and the policy holder whereby the policy holder pays
a certain amount of money at regular intervals and the
insurance provider agrees to pay out an agreed sum of
money to the policy holder’s dependents (usually
family) upon the death of the policy holder.
In some countries, insurance companies have been known
to include catering costs for the funeral in their policy
agreement, but in the UK the main form of life
insurance agreement is to simply have a lump
sum paid to the specified party upon the demise of the
insured person.
Life insurance policies are legal
contracts and the terms mentioned in those contracts
describe the events that the insured person will be
covered for. There are often circumstances of death
that are not covered in a life insurance contract such
as war, suicide, riot or civil commotion.
Life based contracts will usually fall into two different
categories, protection policies and investment policies.
Protection policies are those that provide a benefit
to those parties specified in the contract, usually
a lump sum, in the event of a specified scenario. Investment
policies are where the main objective is to facilitate
the growth of capital by regular or single premiums.
Common forms (in the US anyway) are whole life, universal
life and variable life policies.
The ‘beneficiary’ refers to the person
who will receive the policy proceeds (usually a lump
sum) upon the death of the insured. The beneficiary
can be changed at any time by the policy owner unless
an ‘irrevocable beneficiary’ is designated,
in which case permission must be gained from the beneficiary
regarding any beneficiary changes.
There is a difference between the policy owner and
the insured, although they are usually the same person.
Say a man takes out an insurance policy on his own life;
he is then the policy holder and the insured. However
if his wife takes out a policy for his life, then she
is the policy holder and he is still the insured.
In cases where policy owner differs from the insured,
insurance companies are looking to limit who can take
out a policy for who’s life. This is called an
‘insurable interest requirement’ and it
means that the person taking out the policy would suffer
a genuine loss if the insured should die. This is to
stop people taking out policies on people who they expect
to die and aren’t particularly concerned if they
do or not, and so as not to increase the chances of
murder being committed by someone who has taken out
a policy for someone, and then intends to kill them
to reap the rewards.
As is the case with most general insurance policies,
life insurance is a contract between the insurer and
the insured where a payment is made to pre-designated
parties upon the occurrence of an event covered in the
insurance policy, in the case of life insurance, this
is usually death.
Life insurance or
life assurance is a contract between
the policy owner and the insurer, where the insurer
agrees to pay a sum of money upon the occurrence of
the insured individual's or individuals' death or other
event, such as terminal illness or critical illness.
In return, the policy owner agrees to pay a stipulated
amount called a premium at regular intervals or in lump
sums. There may be designs in some countries where bills
and death expenses plus catering for after funeral expenses
should be included in Policy Premium. In the United
Kingdom, the predominant form simply specifies a lump
sum to be paid on the insured's demise.
As with most insurance policies, life
insurance is a contract between the insurer and
the policy owner whereby a benefit is paid to the designated
beneficiaries if an insured event occurs which is covered
by the policy.
The value for the policyholder is derived,
not from an actual claim event, rather it is the value
derived from the 'peace of mind' experienced by the
policyholder, due to the negating of adverse financial
consequences caused by the death of the Life Assured.
To be a life policy the insured event
must be based upon the lives of the people named in
the policy.
Insured events that may be covered
include:
Serious illness
Life policies are legal contracts and the terms of the
contract describe the limitations of the insured events.
Specific exclusions are often written into the contract
to limit the liability of the insurer; for example claims
relating to suicide, fraud, war, riot and civil commotion.
Life-based contracts tend to
fall into two major categories:
Protection policies - designed to provide
a benefit in the event of specified event, typically
a lump sum payment. A common form of this design is
term insurance.
Investment policies - where the main objective is to
facilitate the growth of capital by regular or single
premiums. Common forms (in the US anyway) are whole
life, universal life and variable life policies.
Parties to contract
There is a difference between the insured
and the policy owner (policy holder), although the owner
and the insured are often the same person. For example,
if Joe buys a policy on his own life, he is both the
owner and the insured. But if Jane, his wife, buys a
policy on Joe's life, she is the owner and he is the
insured. The policy owner is the guarantee and he or
she will be the person who will pay for the policy.
The insured is a participant in the contract, but not
necessarily a party to it.
The beneficiary receives policy proceeds
upon the insured's death. The owner designates the beneficiary,
but the beneficiary is not a party to the policy. The
owner can change the beneficiary unless the policy has
an irrevocable beneficiary designation. With an irrevocable
beneficiary, that beneficiary must agree to any beneficiary
changes, policy assignments, or cash value borrowing.
In cases where the policy owner is
not the insured (also referred to as the celui qui vit
or CQV), insurance companies have sought to limit policy
purchases to those with an "insurable interest"
in the CQV. For life insurance policies, close family
members and business partners will usually be found
to have an insurable interest. The "insurable interest"
requirement usually demonstrates that the purchaser
will actually suffer some kind of loss if the CQV dies.
Such a requirement prevents people from benefiting from
the purchase of purely speculative policies on people
they expect to die. With no insurable interest requirement,
the risk that a purchaser would murder the CQV for insurance
proceeds would be great. In at least one case, an insurance
company which sold a policy to a purchaser with no insurable
interest (who later murdered the CQV for the proceeds),
was found liable in court for contributing to the wrongful
death of the victim (Liberty National Life v. Weldon,
267 Ala.171 (1957)).
Contract terms
Special provisions may apply, such as suicide clauses
wherein the policy becomes null if the insured commits
suicide within a specified time (usually two years after
the purchase date; some states provide a statutory one-year
suicide clause). Any misrepresentations by the insured
on the application is also grounds for nullification.
Most US states specify that the contestability period
cannot be longer than two years; only if the insured
dies within this period will the insurer have a legal
right to contest the claim on the basis of misrepresentation
and request additional information before deciding to
pay or deny the claim.
The face amount on the policy is the initial amount
that the policy will pay at the death of the insured
or when the policy matures, although the actual death
benefit can provide for greater or lesser than the face
amount. The policy matures when the insured dies or
reaches a specified age (such as 100 years old).
Costs, insurability, and underwriting
The insurer (the life insurance company) calculates
the policy prices with intent to fund claims to be paid
and administrative costs, and to make a profit. The
cost of insurance is determined using mortality tables
calculated by actuaries. Actuaries are professionals
who employ actuarial science, which is based in mathematics
(primarily probability and statistics). Mortality tables
are statistically-based tables showing expected annual
mortality rates. It is possible to derive life expectancy
estimates from these mortality assumptions. Such estimates
can be important in taxation regulation.[1][2]
The three main variables in a mortality
table have been age, gender, and use of tobacco. More
recently in the US, preferred class specific tables
were introduced. The mortality tables provide a baseline
for the cost of insurance. In practice, these mortality
tables are used in conjunction with the health and family
history of the individual applying for a policy in order
to determine premiums and insurability. Mortality tables
currently in use by life insurance companies in the
United States are individually modified by each company
using pooled industry experience studies as a starting
point. In the 1980s and 90's the SOA 1975-80 Basic Select
& Ultimate tables were the typical reference points,
while the 2001 VBT and 2001 CSO tables were published
more recently. The newer tables include separate mortality
tables for smokers and non-smokers and the CSO tables
include separate tables for preferred classes. [3]
Recent US select mortality tables predict
that roughly 0.35 in 1,000 non-smoking males aged 25
will die during the first year of coverage after underwriting.[2]
Mortality approximately doubles for every extra ten
years of age so that the mortality rate in the first
year for underwritten non-smoking men is about 2.5 in
1,000 people at age 65.[3] Compare this with the US
population male mortality rates of 1.3 per 1,000 at
age 25 and 19.3 at age 65 (without regard to health
or smoking status).[4]
The mortality of underwritten persons
rises much more quickly than the general population.
At the end of 10 years the mortality of that 25 year-old,
non-smoking male is 0.66/1000/year. Consequently, in
a group of one thousand 25 year old males with a $100,000
policy, all of average health, a life insurance company
would have to collect approximately $50 a year from
each of a large group to cover the relatively few expected
claims. (0.35 to 0.66 expected deaths in each year x
$100,000 payout per death = $35 per policy). Administrative
and sales commissions need to be accounted for in order
for this to make business sense. A 10 year policy for
a 25 year old non-smoking male person with preferred
medical history may get offers as low as $90 per year
for a $100,000 policy in the competitive US life insurance
market.
The insurance company receives the
premiums from the policy owner and invests them to create
a pool of money from which it can pay claims and finance
the insurance company's operations. Contrary to popular
belief, the majority of the money that insurance companies
make comes directly from premiums paid, as money gained
through investment of premiums can never, in even the
most ideal market conditions, vest enough money per
year to pay out claims.[citation needed] Rates charged
for life insurance increase with the insurer's age because,
statistically, people are more likely to die as they
get older.
Given that adverse selection can have
a negative impact on the insurer's financial situation,
the insurer investigates each proposed insured individual
unless the policy is below a company-established minimum
amount, beginning with the application process. Group
Insurance policies are an exception.
This investigation and resulting evaluation
of the risk is termed underwriting. Health and lifestyle
questions are asked. Certain responses or information
received may merit further investigation. Life insurance
companies in the United States support the Medical Information
Bureau (MIB) [4], which is a clearinghouse of information
on persons who have applied for life insurance with
participating companies in the last seven years. As
part of the application, the insurer receives permission
to obtain information from the proposed insured's physicians.[5]
Underwriters will determine the purpose
of insurance. The most common is to protect the owner's
family or financial interests in the event of the insurer's
demise. Other purposes include estate planning or, in
the case of cash-value contracts, investment for retirement
planning. Bank loans or buy-sell provisions of business
agreements are another acceptable purpose.
Life insurance companies are never
required by law to underwrite or to provide coverage
to anyone, with the exception of Civil Rights Act compliance
requirements. Insurance companies alone determine insurability,
and some people, for their own health or lifestyle reasons,
are deemed uninsurable. The policy can be declined (turned
down) or rated.[citation needed] Rating increases the
premiums to provide for additional risks relative to
the particular insured.[citation needed]
Many companies use four general health
categories for those evaluated for a life insurance
policy. These categories are Preferred Best, Preferred,
Standard, and Tobacco.[citation needed] Preferred Best
is reserved only for the healthiest individuals in the
general population. This means, for instance, that the
proposed insured has no adverse medical history, is
not under medication for any condition, and his family
(immediate and extended) have no history of early cancer,
diabetes, or other conditions.[5] Preferred means that
the proposed insured is currently under medication for
a medical condition and has a family history of particular
illnesses.[citation needed] Most people are in the Standard
category.[citation needed] Profession, travel, and lifestyle
factor into whether the proposed insured will be granted
a policy, and which category the insured falls. For
example, a person who would otherwise be classified
as Preferred Best may be denied a policy if he or she
travels to a high risk country.[citation needed] Underwriting
practices can vary from insurer to insurer which provide
for more competitive offers in certain circumstances.
Death proceeds
Upon the insured's death, the insurer requires acceptable
proof of death before it pays the claim. The normal
minimum proof required is a death certificate and the
insurer's claim form completed, signed (and typically
notarized).[citation needed] If the insured's death
is suspicious and the policy amount is large, the insurer
may investigate the circumstances surrounding the death
before deciding whether it has an obligation to pay
the claim.
Proceeds from the policy may be paid
as a lump sum or as an annuity, which is paid over time
in regular recurring payments for either a specified
period or for a beneficiary's lifetime.[citation needed]
Insurance vs Assurance
The specific uses of the terms "insurance"
and "assurance" are sometimes confused. In
general, in these jurisdictions "insurance"
refers to providing cover for an event that might happen
(fire, theft, flood, etc.), while "assurance"
is the provision of cover for an event that is certain
to happen. "Insurance" is the generally accepted
term, however, people using this description are liable
to be corrected. In the United States both forms of
coverage are called "insurance", principally
due to many companies offering both types of policy,
and rather than refer to themselves using both insurance
and assurance titles, they instead use just one.
Types of life insurance
Life insurance may be divided into two basic classes
– temporary and permanent or following subclasses
- term, universal, whole life and endowment life insurance.
Temporary Term Insurance
Term assurance: provides for life insurance coverage
for a specified term of years for a specified premium.
The policy does not accumulate cash value. Term is generally
considered "pure" insurance, where the premium
buys protection in the event of death and nothing else.
There are three key factors to be considered
in term insurance:
- Face amount (protection or death
benefit),
- Premium to be paid (cost to the insured), and
- Length of coverage (term).
Various insurance companies sell term insurance with
many different combinations of these three parameters.
The face amount can remain constant or decline. The
term can be for one or more years. The premium can remain
level or increase. A common type of term is called annual
renewable term. It is a one year policy but the insurance
company guarantees it will issue a policy of equal or
lesser amount without regard to the insurability of
the insured and with a premium set for the insured's
age at that time. Another common type of term insurance
is mortgage insurance, which is usually a level premium,
declining face value policy. The face amount is intended
to equal the amount of the mortgage on the policy owner’s
residence so the mortgage will be paid if the insured
dies.
A policy holder insures his life for
a specified term. If he dies before that specified term
is up, his estate or named beneficiary receives a payout.
If he does not die before the term is up, he receives
nothing. In the past these policies would almost always
exclude suicide. However, after a number of court judgments
against the industry, payouts do occur on death by suicide
(presumably except for in the unlikely case that it
can be shown that the suicide was just to benefit from
the policy). Generally, if an insured person commits
suicide within the first two policy years, the insurer
will return the premiums paid. However, a death benefit
will usually be paid if the suicide occurs after the
two year period.
Life Insurance
Permanent Life Insurance
Permanent life insurance is life insurance that remains
in force (in-line) until the policy matures (pays out),
unless the owner fails to pay the premium when due (the
policy expires OR policies lapse). The policy cannot
be canceled by the insurer for any reason except fraud
in the application, and that cancellation must occur
within a period of time defined by law (usually two
years). Permanent insurance builds a cash value that
reduces the amount at risk to the insurance company
and thus the insurance expense over time. This means
that a policy with a million dollar face value can be
relatively expensive to a 70 year old. The owner can
access the money in the cash value by withdrawing money,
borrowing the cash value, or surrendering the policy
and receiving the surrender value.
The four basic types of permanent insurance
are whole life, universal life, limited pay and endowment.
Whole life coverage
Whole life insurance provides for a level premium, and
a cash value table included in the policy guaranteed
by the company. The primary advantages of whole life
are guaranteed death benefits, guaranteed cash values,
fixed and known annual premiums, and mortality and expense
charges will not reduce the cash value shown in the
policy. The primary disadvantages of whole life are
premium inflexibility, and the internal rate of return
in the policy may not be competitive with other savings
alternatives. Also, the cash values are generally kept
by the insurance company at the time of death, the death
benefit only to the beneficiaries. Riders are available
that can allow one to increase the death benefit by
paying additional premium. The death benefit can also
be increased through the use of policy dividends. Dividends
cannot be guaranteed and may be higher or lower than
historical rates over time. Premiums are much higher
than term insurance in the short-term, but cumulative
premiums are roughly equal if policies are kept in force
until average life expectancy.
Cash value can be accessed at any time
through policy "loans". Since these loans
decrease the death benefit if not paid back, payback
is optional. Cash values are not paid to the beneficiary
upon the death of the insured; the beneficiary receives
the death benefit only. If the dividend option: Paid
up additions is elected, dividend cash values will purchase
additional death benefit which will increase the death
benefit of the policy to the named beneficiary.
Universal life coverage
Universal life insurance (UL) is a relatively new insurance
product intended to provide permanent insurance coverage
with greater flexibility in premium payment and the
potential for a higher internal rate of return. There
are several types of universal life insurance policies
which include "interest sensitive" (also known
as "traditional fixed universal life insurance"),
variable universal life insurance, and equity indexed
universal life insurance.
A universal life insurance policy includes
a cash account. Premiums increase the cash account.
Interest is paid within the policy (credited) on the
account at a rate specified by the company. Mortality
charges and administrative costs are then charged against
(reduce) the cash account. The surrender value of the
policy is the amount remaining in the cash account less
applicable surrender charges, if any.
With all life insurance, there are
basically two functions that make it work. There's a
mortality function and a cash function. The mortality
function would be the classical notion of pooling risk
where the premiums paid by everybody else would cover
the death benefit for the one or two who will die for
a given period of time. The cash function inherent in
all life insurance says that if a person is to reach
age 95 to 100 (the age varies depending on state and
company), then the policy matures and endows the face
value of the policy.
Actuarially, it is reasoned that out
of a group of 1000 people, if even 10 of them live to
age 95, then the mortality function alone will not be
able to cover the cash function. So in order to cover
the cash function, a minimum rate of investment return
on the premiums will be required in the event that a
policy matures.
Universal life insurance addresses
the perceived disadvantages of whole life. Premiums
are flexible. Depending on how interest is credited,
the internal rate of return can be higher because it
moves with prevailing interest rates (interest-sensitive)
or the financial markets (Equity Indexed Universal Life
and Variable Universal Life). Mortality costs and administrative
charges are known. And cash value may be considered
more easily attainable because the owner can discontinue
premiums if the cash value allows it. And universal
life has a more flexible death benefit because the owner
can select one of two death benefit options, Option
A and Option B.
Option A pays the face amount
at death as it's designed to have the cash value equal
the death benefit at maturity (usually at age 95 or
100). With each premium payment, the policy owner is
reducing the cost of insurance until the cash value
reaches the face amount upon maturity.
Option B pays the face amount
plus the cash value, as it's designed to increase the
net death benefit as cash values accumulate. Option
B offers the benefit of an increasing death benefit
every year that the policy stays in force. The drawback
to option B is that because the cash value is accumulated
"on top of" the death benefit, the cost of
insurance never decreases as premium payments are made.
Thus, as the insured gets older, the policy owner is
faced with an ever increasing cost of insurance (it
costs more money to provide the same initial face amount
of insurance as the insured gets older).
Limited-pay
Another type of permanent insurance is Limited-pay life
insurance, in which all the premiums are paid over a
specified period after which no additional premiums
are due to keep the policy in force. Common limited
pay periods include 10-year, 20-year, and paid-up at
age 65.
Endowments
Endowments are policies in which the cash value built
up inside the policy, equals the death benefit (face
amount) at a certain age. The age this commences is
known as the endowment age. Endowments are considerably
more expensive (in terms of annual premiums) than either
whole life or universal life because the premium paying
period is shortened and the endowment date is earlier.
In the United States, the Technical
Corrections Act of 1988 tightened the rules on tax shelters
(creating modified endowments). These follow tax rules
as annuities and IRAs do.
Endowment Insurance is paid out whether
the insured lives or dies, after a specific period (e.g.
15 years) or a specific age (e.g. 65).
Accidental Death
Accidental death is a limited life insurance that is
designed to cover the insured when they pass away due
to an accident. Accidents include anything from an injury,
but do not typically cover any deaths resulting from
health problems or suicide. Because they only cover
accidents, these policies are much less expensive than
other life insurances.
It is also very commonly offered as
"accidental death and dismemberment insurance",
also known as an AD&D policy. In an AD&D policy,
benefits are available not only for accidental death,
but also for loss of limbs or bodily functions such
as sight and hearing, etc.
Accidental death and AD&D policies
very rarely pay a benefit; either the cause of death
is not covered, or the coverage is not maintained after
the accident until death occurs. To be aware of what
coverage they have, an insured should always review
their policy for what it covers and what it excludes.
Often, it does not cover an insured who puts themselves
at risk in activities such as: parachuting, flying an
airplane, professional sports, or involvement in a war
(military or not). Also, some insurers will exclude
death and injury caused by proximate causes due to (but
not limited to) racing on wheels and mountaineering.
Accidental death benefits can also
be added to a standard life insurance policy as a rider.
If this rider is purchased, the policy will generally
pay double the face amount if the insured dies due to
an accident. This used to be commonly referred to as
a double indemnity coverage. In some cases, some companies
may even offer a triple indemnity cover.
Life Insurance Products
Related Life Insurance Products
Riders are modifications to the insurance policy added
at the same time the policy is issued. These riders
change the basic policy to provide some feature desired
by the policy owner. A common rider is accidental death,
which used to be commonly referred to as "double
indemnity", which pays twice the amount of the
policy face value if death results from accidental causes,
as if both a full coverage policy and an accidental
death policy were in effect on the insured. Another
common rider is premium waiver, which waives future
premiums if the insured becomes disabled.
Joint life: insurance is either a term
or permanent policy insuring two or more lives with
the proceeds payable on the first death or second death.
Survivorship life: is a whole life
policy insuring two lives with the proceeds payable
on the second (later) death.
Single premium whole life: is a policy
with only one premium which is payable at the time the
policy is issued.
Modified whole life: is a whole life
policy that charges smaller premiums for a specified
period of time after which the premiums increase for
the remainder of the policy.
Group life insurance: is term insurance
covering a group of people, usually employees of a company
or members of a union or association. Individual proof
of insurability is not normally a consideration in the
underwriting. Rather, the underwriter considers the
size and turnover of the group, and the financial strength
of the group. Contract provisions will attempt to exclude
the possibility of adverse selection. Group life insurance
often has a provision that a member exiting the group
has the right to buy individual insurance coverage.
Senior and preneed productS: Insurance
companies have in recent years developed products to
offer to niche markets, most notably targeting the senior
market to address needs of an aging population. Many
companies offer policies tailored to the needs of senior
applicants. These are often low to moderate face value
whole life insurance policies, to allow a senior citizen
purchasing insurance at an older issue age an opportunity
to buy affordable insurance. This may also be marketed
as final expense insurance, and an agent or company
may suggest (but not require) that the policy proceeds
could be used for end-of-life expenses.
Preneed (or prepaid) insurance policies:
are whole life policies that, although available at
any age, are usually offered to older applicants as
well. This type of insurance is designed specifically
to cover funeral expenses when the insured person dies.
In many cases, the applicant signs a prefunded funeral
arrangement with a funeral home at the time the policy
is applied for. The death proceeds are then guaranteed
to be directed first to the funeral services provider
for payment of services rendered. Most contracts dictate
that any excess proceeds will go either to the insured's
estate or a designated beneficiary.
Investment policies
With-profits policies:
Some policies allow the policyholder
to participate in the profits of the insurance company
these are with-profits policies. Other policies have
no rights to participate in the profits of the company,
these are non-profit policies.
With-profits policies are used as a
form of collective investment to achieve capital growth.
Other policies offer a guaranteed return not dependent
on the company's underlying investment performance;
these are often referred to as without-profit policies
which may be construed as a misnomer.
Investment Bonds
Pensions: Pensions are a form of life assurance. However,
whilst basic life assurance, permanent health insurance
and non-pensions annuity business includes an amount
of mortality or morbidity risk for the insurer, for
pensions there is a longevity risk.
A pension fund will be built up throughout
a person's working life. When the person retires, the
pension will become in payment, and at some stage the
pensioner will buy an annuity contract, which will guarantee
a certain pay-out each month until death.
Annuities
An annuity is a contract with an insurance company whereby
the purchaser pays an initial premium or premiums into
a tax-deferred account, which pays out a sum at pre-determined
intervals. There are two periods: the accumulation (when
payments are paid into the account) and the annuitization
(when the insurance company pays out).
Tax and life insurance
Taxation of life insurance
in the United States
Premiums paid by the policy owner are normally not deductible
for federal and state income tax purposes.
Proceeds paid by the insurer upon death
of the insured are not included in gross income for
federal and state income tax purposes;[6] however, if
the proceeds are included in the "estate"
of the deceased, it is likely they will be subject to
federal and state estate and inheritance tax.
Cash value increases within the policy
are not subject to income taxes unless certain events
occur. For this reason, insurance policies can be a
legal and legitimate tax shelter wherein savings can
increase without taxation until the owner withdraws
the money from the policy. On flexible-premium policies,
large deposits of premium could cause the contract to
be considered a "Modified Endowment Contract"
by the Internal Revenue Service (IRS), which negates
many of the tax advantages associated with life insurance.
The insurance company, in most cases, will inform the
policy owner of this danger before applying their premium.
Tax deferred benefit from a life insurance
policy may be offset by its low return in some cases.
This depends upon the insuring company, type of policy
and other variables (mortality, market return, etc.).
Also, other income tax saving vehicles (i.e. Individual
Retirement Account (IRA), 401K or Roth IRA) may be better
alternatives for value accumulation. This will depend
on the individual and their specific circumstances.
The tax ramifications of life insurance
are complex. The policy owner would be well advised
to carefully consider them. As always, the United States
Congress or the state legislatures can change the tax
laws at any time.
Taxation of life assurance in the United Kingdom
Premiums are not usually allowable against income tax
or corporation tax, however qualifying policies issued
prior to 14 March 1984 do still attract LAPR (Life Assurance
Premium Relief) at 15% (with the net premium being collected
from the policyholder).
Non-investment life policies do not
normally attract either income tax or capital gains
tax on claim. If the policy has as investment element
such as an endowment policy, whole of life policy or
an investment bond then the tax treatment is determined
by the qualifying status of the policy.
Qualifying status is determined at
the outset of the policy if the contract meets certain
criteria. Essentially, long term contracts (10 years
plus) tend to be qualifying policies and the proceeds
are free from income tax and capital gains tax. Single
premium contracts and those run for a short term are
subject to income tax depending upon your marginal rate
in the year you make a gain. All (UK) insurers pay a
special rate of corporation tax on the profits from
their life book; this is deemed as meeting the lower
rate (20% in 2005-06) liability for policyholders. Therefore
a policyholder who is a higher rate taxpayer (40% in
2005-06), or becomes one through the transaction, must
pay tax on the gain at the difference between the higher
and the lower rate. This gain is reduced by applying
a calculation called top-slicing based on the number
of years the policy has been held. Although this is
complicated, the taxation of life assurance based investment
contracts may be beneficial compared to alternative
equity-based collective investment schemes (unit trusts,
investment trusts and OEICs). One feature which especially
favors investment bonds is the '5% cumulative allowance'
– the ability to draw 5% of the original investment
amount each policy year without being subject to any
taxation on the amount withdrawn. If not used in one
year, the 5% allowance can roll over into future years,
subject to a maximum tax deferred withdrawal of 100%
of the premiums payable. The withdrawal is deemed by
the HMRC (Her Majesty's Revenue and Customs) to be a
payment of capital and therefore the tax liability is
deferred until maturity or surrender of the policy.
This is an especially useful tax planning tool for higher
rate taxpayers who expect to become basic rate taxpayers
at some predictable point in the future (e.g. retirement),
as at this point the deferred tax liability will not
result in tax being due.
The proceeds of a life policy will
be included in the estate for death duty (in the UK,
inheritance tax (IHT)) purposes, except that policies
written in trust may fall outside the estate. Trust
law and taxation of trusts can be complicated, so any
individual intending to use trusts for tax planning
would usually seek professional advice from an Independent
Financial Adviser (IFA) and/or a solicitor.
Pension Term Assurance
Although available before April 2006, from this date
pension term assurance became widely available in the
UK. Most UK product providers adopted the name "life
insurance with tax relief" for the product. Pension
term assurance is effectively normal term life assurance
with tax relief on the premiums. All premiums are paid
net of basic rate tax at 22%, and higher rate tax payers
can gain an extra 18% tax relief via their tax return.
Although not suitable for all, PTA briefly became one
of the most common forms of life assurance sold in the
UK until the Chancellor, Gordon Brown, announced the
withdrawal of the scheme in his pre-budget announcement
on 6 December 2006. The tax relief ceased to be available
to new policies transacted after 6 December 2006, however,
existing policies have been allowed to enjoy tax relief
so far.
Life
Insurance |
