1 : 3 - Life Assurance, Pension Policies and Employer-Based Policies Flashcards
What is Life Assurance or Death in Service Cover?
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.
Why has the cost of life assurance generally decreased?
Due to increases in life expectancy
What is the charge on any excess above the Lifetime Allowance (LTA) for employees?
55%
How can life cover avoid an LTA charge?
It is now more commonly provided through ‘excepted’ life policies such as relevant life policies.
An employer will generally find that a lower premium is payable if:
(4)
- 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
What has made offering life cover for employees an
attractive option for employers?
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.
Generally, how much would an employer providing cover of four times earnings expect to pay?
In the region of 0.25–0.5% of the payroll
Why is a tax-free lump sum rather than a regular pension (which is taxable) often preferred?
It is much easier to understand for employees, and provides an immediate benefit to dependants.
What is a trust?
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.
What do trusts provide?
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
Why else are trusts useful?
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.
What are interest-inpossession trusts used for?
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’
What are discretionary trusts used for?
These may name beneficiaries but give the trustee the power of bestowing any or all of the capital and income to the beneficiaries.
Potentially exempt transfers (PETs) fall outside the donor’s estate for IHT purposes as long as:
(4)
- 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.
When would a transfer be known as a chargeable lifetime transfer (CLT)?
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.
Are life assurance policies, where the benefits are transferred into trust, are usually considered to be PET?
No
When should the policy should be written under a split trust arrangement?
Where a policy provides benefit on an either/or basis,
ie: benefit payable in the event of critical illness or death
What does a split trust allow?
The life assured to receive any critical illness benefit while ensuring that any death benefit is held in trust for the nominated beneficiaries.
How can trusts help with life insurance policies?
They can be used to ensure that life insurance policies provide the maximum potential benefit for those to whom they are paid out.
How are life insurance policies treated for IHT, if written OUTSIDE a trust?
How does this change if they are a homeowner?
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.
How are life insurance policies treated for IHT, if written INSIDE a trust?
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.
What is underwriting?
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.
What risk factors do underwriters assess?
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