Tax Efficient Life Insurance
Tax Efficient Life Insurance
Tax efficient life insurance is a relatively new product that has been released by many of the major insurers to coincide with the Governments new initiatives regarding the taxation of pensions.
Prior to April 6th 2006 Government restrictions meant that only 10% of an individual’s pension contributions could be used to buy pension term assurance, now called tax efficient life insurance. However on the 6th April the restrictions were abolished and there is now no limit to how much you can spend on life cover.
Because tax efficient life insurance policies are bought in conjunction with a pension they benefit from the same tax relief as long as the total value of the pension contributions and life insurance premiums do not exceed the standard annual allowance of £215,000 or 100% of your annual earnings.
This means that individuals who pay tax will be able to claim tax relief for every payment they make on their life insurance. Basic rate tax payers who pay around £100 a month for their life insurance policy will only actually pay £78 of their own money as the rest will be claimed on their behalf by their insurance company. Similarly, high-rate tax payers that also take out £100/month policies will only pay around £60.
The fact that tax can be claimed back on each payment means that for many people tax efficient life insurance is cheaper than the standard types of cover; high-rate tax payers can save up to 30% per year in premiums. The actual policy will be more expensive than an ordinary policy but when the tax relief is taken into account they still remain the cheaper option for the majority of people.
As with most things in life there are a few catches to be aware of before taking out tax efficient life insurance. The first is that only basic cover is available. This means that critical illness cover and other added extras that are normally available with other insurance policies can not be bought with this type of policy. The second catch is of special concern to those who have large retirement funds because in the event of the policy holders death the value of the pension fund is added to the payout from the life insurance policy and the total is compared to the new lifetime limit of £1.5million. Anything over this limit is taxed at a whopping 55% whereas with an ordinary policy it is not taxed at all.
Individual circumstances should be taken into account and weighed up before anybody decides to cash in their present policy and take out a tax efficient policy. If in doubt consult a financial advisor to see if this is a more beneficial policy for you.