When approaching later life, as term assurance comes to an end, clients do not want to be concerned with either increasing mortgage terms or reevaluating wills in order to avoid inheritance tax issues. By taking out whole of life cover instead, Simon O'Connor says they will avoid paying out unnecessary costs.
The credit crunch has been going on for a long time now, and there is still apparently some way to go before we come out the other side. And no-one really knows what the other side might look like when we get there.
It is often said that in times like these, one of the first things that people remove from their family budgets is life cover. The reason being ‘Why pay for something that may happen at some point in the future when I can’t make ends meet now?’
The counter argument is that whatever need a client has for protection has not gone away because of the tough economic climate. Inflation is dropping and interest rates cannot go much lower but neither of these reduces the capital of a mortgage. Falling property prices may have reduced estate values for inheritance tax allowance purposes but even then, to a greater or lesser extent, keeping the cover in place will help to bolster any beneficiaries’ inheritance.
This is particularly pertinent at older ages when people become more aware of their own mortality and more accepting of the need to maintain cover. ‘Increasing longevity’ is an expression that we often hear these days in relation to pensions but, it can have just as much impact on protection planning. A client outliving their protection cover is a whole new risk area that should not be underestimated, particularly during tough economic times.
There are a couple of key areas where help and advice may be needed, and whole of life cover could be a good solution.
Mortgages
Firstly, there are mortgages. While falling interest rates will come as a welcome relief to many, those nearing the end of their mortgage term may well be facing a dilemma – either to repay or extend the term.
In the current climate, the ability to repay could be a real issue. Someone coming to the end of a 25 year interest only mortgage may have either an underperforming endowment – and if it was not 12 months ago, it almost certainly is now – or seen the value of their other assets fall. In these circumstances, extending the term or converting to a lifetime mortgage may be the best option. Avoid having to repay when you do not have the cash and continue to take advantage of the lowest interest rates in living memory.
A mortgage does not sit alone in peoples minds. If people are strapped for cash, the savings they have may now be needed to pay for other things – for example university fees for the kids or care costs for the parents – which might not have been a consideration when they took their first steps onto the property ladder.
The pitfall to extending a mortgage term, of course, and where advice may be needed, is what to do about mortgage protection? If your mortgage is covered by the sum assured under an endowment policy, the cover will expire on maturity. If it is covered by a term policy, the same is going to happen when the term expires. Finding a way to keep a mortgage covered when the term is extended is crucial.
There is a strong argument here for whole of life – you are covered for the rest of your life and once you are in, you are guaranteed cover without the worries of further underwriting in your later years. What is more, if you are in your 50s, which is quite likely if you are at the end of the 25 year mortgage, on a maximum cover basis, whole of life is likely to be no more expensive in the short term than term assurance.
It is not just about covering an extended mortgage. A whole of life policy provides cover for the rest of your life and can be used to cover different things at different times. It might be bought to cover an extended mortgage but, in the future, the same policy could be used either to help cover an inheritance tax (IHT) liability or to provide an inheritance in its own right.
Inheritance
We have all heard that a future Conservative government aims to scrap IHT on estates valued at under £1m but, right now, IHT is still a concern to the majority of people. Even with falling property prices, there are still plenty of people who could be hit between now and that unspecified future date.
In a recent survey conducted for Lincoln Financial Group, 79% of those near or already in retirement wanted to minimise their inheritance bill in order to ensure they are leaving the largest possible legacy to their beneficiaries.
This is clearly an emotive point, which is no doubt why the Conservatives see their manifesto pledge as a sure-fire vote winner. For those who want to hedge their bets on whether IHT will still affect them in a few years time, rather than rely on the surety of a political promise, a low cost maximum cover whole of life plan might be the answer. It gives you far more options if your circumstances – such as IHT liability– change in the future and, as has been said earlier, if in your 50s or 60s, it is likely to be no more expensive than a comparable term policy.
On the subject of inheritance more generally, in light of the credit crunch, Lincoln Financial’s research shows that two thirds of people who intended to leave an inheritance have seen the value of their estates reduced by the recession. 40% of those surveyed thought it had only affected the value slightly and the remainder the of total surveyed (26%) considered it had a more severe impact and that they would now have substantially less to pass on to their dependants.
Despite this, 39% said they would not be taking any action to maximise their legacy, and this percentage was even higher among the over 55s. Whole of life cover can give people an outlet for providing their family with an inheritance in a tax efficient way – especially while many of their other assets may have decreased in value during the recession.
Now, more than ever, people are looking to cut their expenditure or redirect what they have to more pressing and immediate areas. But no matter how long the credit crunch continues, the need for cover does not go away; it may change shape in the way that it is provided but it always pays to be prepared - especially for the over 50s. Life is continually changing and so will the protection that a client needs throughout their life.
Simon O’Connor is head of products and marketing at Lincoln Financial Group
