1 : 3 - Life Assurance, Pension Policies and Employer-Based Policies

Question 1

What is Life Assurance or Death in Service Cover?

Answer 1

Life assurance, or death in service cover, is a benefit that is normally offered as part of an employer’s benefits package.

Employers are able to use economies of scale to purchase life cover for pension scheme members at a considerable discount to the price that would be paid if individuals were to purchase the same benefits on their own.

Question 2

Why has the cost of life assurance generally decreased?

Answer 2

Due to increases in life expectancy

Question 3

What is the charge on any excess above the Lifetime Allowance (LTA) for employees?

Answer 3

55%

Question 4

How can life cover avoid an LTA charge?

Answer 4

It is now more commonly provided through ‘excepted’ life policies such as relevant life policies.

Question 5

An employer will generally find that a lower premium is payable if:

(4)

Answer 5

• the proportion of women in the workforce is higher than men
• the average age of the workforce is low
• the workforce is involved in a lower-risk occupation(s),
• the workforce is based in an area where life expectancy is high

Question 6

What has made offering life cover for employees an

attractive option for employers?

Answer 6

As employer contributions to DC pension schemes tend to be lower than in DB schemes, and greater flexibility has arisen in possible benefits - employers have found it cost-effective to increase life cover protection.

Question 7

Generally, how much would an employer providing cover of four times earnings expect to pay?

Answer 7

In the region of 0.25–0.5% of the payroll

Question 8

Why is a tax-free lump sum rather than a regular pension (which is taxable) often preferred?

Answer 8

It is much easier to understand for employees, and provides an immediate benefit to dependants.

Question 9

What is a trust?

Answer 9

A trust is an arrangement where a settlor transfers property/assets to a trustee who then manages the property/assets on behalf of the beneficiaries.

Question 10

What do trusts provide?

Answer 10

A method of protection of assets by keeping them separate from the person or body that has settled them.

As a result, the assets no longer belong to the original funder and therefore are an effective vehicle for protecting the asset from a deterioration of the settlor’s financial position

Question 11

Why else are trusts useful?

Answer 11

In ensuring that a benefactor’s wishes are enacted, as separate persons can be appointed as trustees to oversee the use of the assets, which can be any type of belongings.

Question 12

What are interest-inpossession trusts used for?

Answer 12

To ensure the trust income is paid to one beneficiary – known as the ‘life tenant’,

and said to have a ‘life interest’ – while the capital would be paid to a different beneficiary on the death of the first, known as the ‘remainderman’ or ‘capital beneficiary’

Question 13

What are discretionary trusts used for?

Answer 13

These may name beneficiaries but give the trustee the power of bestowing any or all of the capital and income to the beneficiaries.

Question 14

Potentially exempt transfers (PETs) fall outside the donor’s estate for IHT purposes as long as:

(4)

Answer 14

• the transfer is made by an individual
• it was made on or after 18 March 1986
• it was made to another individual or specified trust,
• the donor survives for seven years after the date of the transfer.

Question 15

When would a transfer be known as a chargeable lifetime transfer (CLT)?

Answer 15

If the gift is to a discretionary trust and/or most types of interest-in-possession (IIP) trusts since 22 March 2006.

In 2006 trust law changed in order to prevent their use as tax avoidance schemes.

Question 16

Are life assurance policies, where the benefits are transferred into trust, are usually considered to be PET?

Answer 16

No

Question 17

When should the policy should be written under a split trust arrangement?

Answer 17

Where a policy provides benefit on an either/or basis,

ie: benefit payable in the event of critical illness or death

Question 18

What does a split trust allow?

Answer 18

The life assured to receive any critical illness benefit while ensuring that any death benefit is held in trust for the nominated beneficiaries.

Question 19

How can trusts help with life insurance policies?

Answer 19

They can be used to ensure that life insurance policies provide the maximum potential benefit for those to whom they are paid out.

Question 20

How are life insurance policies treated for IHT, if written OUTSIDE a trust?

How does this change if they are a homeowner?

Answer 20

The policy will be paid into the estate of the deceased individual.

If this individual is a homeowner, it is possible that this will either create or increase a liability for IHT.
IHT is currently payable on assets over £325,000, and is levied at a rate of 40%. Thus, if the estate of the individual totals more than this figure, their heirs will lose 40% of all, or at least part, of the life insurance payout.

Question 21

How are life insurance policies treated for IHT, if written INSIDE a trust?

Answer 21

Under this arrangement, the money that is paid upon the death of the policyholder is not counted as part of their estate.

Rather, it will pass directly to the intended beneficiaries; these will be detailed in the document used to establish the trust (the trust deed). Because the money has bypassed the estate of the policyholder, it will not be subject to IHT.

It can also be paid out without waiting for probate, so the beneficiaries may receive the money more quickly.

Question 22

What is underwriting?

Answer 22

When an individual applies for life, critical illness or income protection (IP) cover the insurer will make an assessment of the risks through a process known as underwriting.

Through this they determine whether the individual is eligible for insurance cover, and how much the premium will cost.

Question 23

What risk factors do underwriters assess?

7

Answer 23

Age
Health
Build
Family History
Hazardous Activities and Occupations
Smoking, Alcohol and Drugs
Residency and Travel