Bereavement is bad enough without money troubles. Rachel Clarke explains the complexities of using whole of life policies
The sum assured will be matched to the IHT liability.
An IHT liability is likely to increase with inflation. However, the impact can be reduced by selecting a whole of life plan which allows for indexation of the sum assured.
Cover can be arranged on an own-life basis for a single person or surviving spouse. Alternatively, a married couple may wish the survivor to inherit on first death, with the IHT liability being postponed until the second death.
In this case a joint life policy, payable on second death may be appropriate, as the plan will pay when the charge to IHT will arise.
It is important to note that the IHT position must be settled with HM Revenue & Customs before probate (confirmation in Scotland) can be granted.
However, the personal representatives will not be entitled to administer the estate until this has happened.
Trusts
By placing the policy in trust, a lengthy probate process delay can be avoided.
The trustees will be able to present the death certificate to the protection provider and make a claim, without the need for a grant of probate.
When probate is granted, the estate can be distributed to the people it was intended for, rather than going to HM Revenue & Customs.
If the policyholder is included as a trustee, they will be able to retain some control of the policy during their lifetime.
The policyholder can also select an additional trustee, to administer the trust after their death, and beneficiaries who will receive the policy proceeds, which is known as the trust fund.
If a discretionary trust is chosen, the policyholder will have flexibility to change the beneficiaries in the future, which can be useful if circumstances change.
And even if there isn’t any inheritance tax to pay on an estate, the lump sum from a whole of life policy could help a bereaved family in other ways.
For instance, it could help towards funeral costs and the repayment of outstanding loans as well as other expenses.
Family businesses
The flexibility of a whole of life policy means that it can be used in a variety of situations, sometimes to surprising effects.
Take family businesses for example. They account for three million of the UK’s 4.6 million private sector businesses, according to the Office for National Statistics.
Ownership protection arrangements for businesses usually involve protection policies being put in place for each of the business owners.
On death, a cash sum is paid to the surviving co-owners.
