When it comes to inheritance tax (IHT) planning, term assurance can be a game-changer.
This life insurance product pays a lump sum if the insured person passes away during the set term. If they outlive the policy, there’s no payout. So, why consider term assurance?
Affordable Family Protection
Term life insurance is often the most affordable option for life coverage. It’s great for young families who want to protect their finances. It can also pay off outstanding loans or mortgages, making sure that loved ones don’t have to deal with debt after the borrower passes away.
Shielding Your Estate
When you’re giving gifts within the nil rate band (NRB) for Inheritance Tax (IHT) purposes, remember that these gifts will still count towards your estate’s value for seven years. If you pass away during this time, you could lose the NRB, which means you’ll have to pay more in IHT. To protect against this potential tax cost, you can consider a seven-year level term assurance policy to ensure that your estate won’t be negatively affected.
Covering Larger Gifts
If you give gifts above the tax-free allowance and pass away within seven years, the person who received the gift may have to pay a tax called Inheritance Tax. To help reduce this tax, you can use a decreasing term assurance, also known as a “gift inter vivos” plan. This plan helps manage the decreasing tax liability over seven years, protecting your loved ones from unexpected tax bills.
Temporary Solutions for Complex Situations
If you are still working on your inheritance tax planning or are not ready for a long-term commitment, term assurance can provide a temporary solution. It gives you time to consider your options while ensuring that you have the necessary coverage for the time being.
Case Study: Protecting a Gift
Let’s consider Paul, who wants to gift £500,000 to his partner, Darren. If Paul passes away within seven years, Darren may have to pay £67,600 in Inheritance Tax on this gift. Paul can protect Darren from this tax bill by getting a gift inter vivos plan. Another option is to use a level-term assurance to make up for the Inheritance Tax Nil Rate Band lost due to the gift, which would prevent an additional £130,000 tax on his estate.
