Life insurance and death benefit planning

Some of the most valuable assets held in an estate will not actually become accessible until after death. However that is not to say that planning for the use of these benefits and the taxation of these benefits should be any less important. Death benefit wealth arises in a number of ways:

a. Life insurance

It is worth noting that life insurance has many purposes a few of which are:

  1. To cover mortgage lending
  2. To cover inheritance tax
  3. Business key man cover
  4. To provide a lump sum to surviving family

b. Death in service

You may be part of your employers’ group policy scheme which provides a multiplier of your salary as a death benefit if you die while in service.

c. Pension funds

A good example is if you have a self-invested pension plan and have not drawn down any income benefits. Some or all of the funds will be returned on death.

d. Critical illness policies

These types of policies produce an income supplement in the event of a critical illness and on death there is usually a lump sum paid.

As with any form of asset or wealth, if a lumps sum falls into a survivor’s estate it will be subject to tax, second marriage and access by young beneficiaries, all of which threaten to significantly waste the benefit of the policy. It is also essential to ensure that lump sum proceeds do not fall into the insured’s estate otherwise inheritance tax may bite on the proceeds.

There are steps that you can take to protect life insurance and death benefit wealth:

  1. Ensure the policy is written onto an appropriate trust
  2. Nominate death in service onto trust or to next of kin
  3. Assign existing life insurance onto trust
  4. Where rules allow, nominate pension funds onto trust

A trust protects and ring fences lump sum proceeds but surviving family may have access to the wealth through the trustees. This is therefore tax efficient and wealth preservation planning without prejudicing surviving family.

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