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CPAA Insight: Getting to grips with life cover after recent changes

9th Jan 2014
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This article first appeared in the December  2013 edition of CPAA's membership magazine, Practising Accountant.

Getting to grips with life cover

Mattioli Woods Consultant, Eddy Woore, takes a new look at relevant life cover following recent changes

THE IMPENDING LOWERING of the lifetime allowance to £1.25m has made a new form of relevant life cover, increasingly appropriate for certain clients.  

This is particularly tax-efficient for those who pay themselves in dividends, rather than a basic salary. It is similar to a death-in-service plan, established by a business for an employee under pension rules.  However, it is an individual plan, like level-term assurance, and is taken to say 60 or 65 years-old for a specific sum assured.  

The cover can be up to ten times an earnings figure, which can include dividends, but providers do vary in their definition of maximum cover. This sum assured, unlike pension-based death-in-service cover, is not added to a pension fund value on death, which helps avoid going over the new £1.25 million limit.

The policy can be established on a guaranteed basis, so unlike death-in-service cover, which is reviewed every year, the member has a guaranteed premium until the plan matures, even if their health deteriorates. 

”With more people potentially being caught by the lifetime allowance, including people in final salary schemes who do not necessarily know they have a problem yet, it is increasingly important to consider relevant life cover as an option...”

The company-paid premiums are not a benefit-in-kind for the member, so there is no tax disadvantage, particularly for higher earners. This is also useful for smaller companies where the minimum membership for a group death-in-service plan is hard to achieve.

All providers offer a trust at the point of sale, which is when it must be established.  Providing this is done, the vast majority of benefits will be outside the estate. Technically, there might be an amount of the premium rolled-up over the years that will fall into the estate on fine-tuning of inheritance tax (IHT) calculations, but the sum assured will not.  

What happens if the client leaves the service of the employer?

The plan can be assigned and they take over the premiums.  This could be valuable, as a plan taken out relatively early in life, with a guaranteed premium, may be a lot cheaper than the same sum assured later in life, potentially after medical problems.  

What isn’t covered?

This is purely life cover paid on death, or under a definition of early terminal illness, and it does not provide critical illness cover like some policies.  This is the same for death-in-service policies.  With more people potentially being caught by the lifetime allowance, including people in final salary schemes who do not necessarily know they have a problem yet, it is increasingly important to consider relevant life cover as an option, either for new cover or to replace existing cover.  

For  information and advice on relevant life and other cover please contact Eddy Woore:  e[email protected]07970 275746
 

For more information on the CPAA and the support on offer to practicing accountants visit www.acpa.org.uk

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