More focus on loved ones and legacy

By Joe Lynam

10th April 2021

Almost 126,000 people in the UK have died as a result of Covid-19. That’s more than the number of British civilians killed in both world wars. The shocking loss of life should abate with the rollout of vaccines, but it has already focused the thoughts of millions on their own mortality. Should we die before we expect to, we would like to think our dependents might inherit something more positive than a financial headache. That’s why minds have turned to life insurance.

A 2020 poll by consultancy firm EY found that 58 per cent of those surveyed agreed that Covid-19 had made them re-evaluate their financial wellbeing. More advisers are specialising in life cover, and VouchedFor, a service that helps people find those with the best reputations, now provides a separate list of specialists within its guide.

There are different types of life insurance. Term insurance is the simplest option: you choose a policy to cover you for a fixed number of years. If you die within that period it will pay out but if you live longer, the premiums aren’t returned. Term insurance can also be increasing, level or decreasing, so the potential payout may change over time.

A typical example might be a decreasing term policy designed to cover a large repayment mortgage. Should you die before your mortage is cleared, you want the peace of mind that the bill won’t have to be picked up by your dependents. As the mortgage reduces over time, the potential payout reduces too.

An alternative is a whole-of-life policy, which as the name suggests covers you until you die and is typically more expensive as a result. A life insurance payout does not always have to be taken as a lump sum either. For example, a family income benefits policy will pay out a monthly income to beneficiaries until its expiry date.

As for the cost, premiums depend on age, lifestyle, profession, health, and the type and size of a policy. “Generally, the younger you are and the healthier you are, the lower the premium you will pay,” says Liam Richards, director of Owl Financial, a protection-focused advice firm. “Insurers decide the premium based on how likely you are to make a claim – younger, healthier people make fewer claims.”

Liam cautions against just opting for the cheapest premiums. “You need to consider the value of the plan, the service from the provider and the claims experience, should it be needed. Advisers can help you through the process.”

Contrary to public scepticism, payout rates for life cover are high, with a 97.4 per cent payout for term life insurance and

99.99 per cent for whole-of-life policies, according to figures from insurer Liverpool Victoria.

Liam cautions that not disclosing relevant personal information
– particularly about your health
– when setting up a policy could have “a profound impact on you or your loved ones when you come to make a claim”. If in doubt, disclose it. The figures show that when set up in the right way, plans will pay out in the desired manner.

6 WAYS TO BECOME MORE TAX EFFICIENT

1. Make use of your annual individual savings account (ISA) allowance, through which you can shelter savings and investments worth up to £20,000 a year from tax
on income or profit.

2. Take advantage of income tax relief on pensions savings. It costs additional, higher and basic rate taxpayers £550, £600 and £800 respectively to pay £1,000 into a private pension. But keep an eye on the annual allowance, which limits most

to annual pension contributions of £40,000, or their income
if lower. Watch out for the pensions lifetime allowance, which imposes tax on funds worth more than £1,073,000.

3. Investments including venture capital trusts (VCTs) and the enterprise investment scheme (EIS) offer additional tax breaks for savers who have used up their ISA allowances.

4. Potential inheritance tax liabilities can be reduced with careful planning. For example, you may be able to give away assets that reduce the value of your estate, or use trust structures to protect parts
of it from tax.

5. Make use of the annual allowances that mean you earn interest on savings, receive dividend payments and make investment profits with no tax to pay – these are worth £1,000, £2,000 and £12,300 respectively.

6. Take professional financial advice on how to implement these tax efficiencies so that you arrange your finances, including your savings and investments, in the most appropriate manner for your individual needs. Everyone is different.

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