When it comes to life insurance there always seems to be a focus on newlyweds, young families and mortgages. However, the older generation can benefit as much
from life insurance as the younger one.
Taking Out Life Insurance
Life insurance is sold to younger people to make sure that in the event of their death their family or mortgage is covered. Those who have retired are likely to take out life insurance for different reasons, however.
For pensioners, one of the most important concerns is leaving an inheritance to their families and life insurance can be a key factor in proper estate planning. Whole of life insurance policies, can guarantee to provide an inheritance and can also be set up to be free of inheritance tax. Insurance companies have become
extremely creative providing a variety of products to provide for a variety of circumstances. Do you have a child from a previous marriage that you fear might get cut out of your spouses will? No worries, a paid up life insurance policy can cover that. Want to provide a lifetime income? A policy with an annuity provision can do that. Have an annuity and want to be sure to provide an inheritance as well? Just add an insurance policy.
Choosing the Right Policy
There are two types of life insurance policy, term insurance and whole life. A term insurance policy ends when a certain period of time ends. If you die within the period, then the policy pays out, if you don’t die, then the cover expires and the policy does not pay out.
Retirees who are looking for a guarantee that the policy that will pay out when they die, however, are generally told that they should consider whole life coverage. There are whole groups of companies that are offering whole of life policies to the retired. This means that there is more competition when it comes to this type of insurance, and that it is likely to be quite cheap. With these policies there is often a ‘qualifying period’ of a year or so, which means that if you die within this period, then the policy will not pay out.
Originally, term insurance was designed to cover things like covering your mortgage payment or college expenses for your kids if you should die before they are paid off. But because of the fact that it is possible to outlive the policy and receive nothing the cost of term insurance is lower than whole life. And these days due to all the competition it is possible to get a 30 year term policy even if you are in your 50’s or even 60’s. So it is possible to get a reasonably priced term policy that will cover you until you are 90. Of course if you live to be 91…Â but it may pay to consider these policies as part of your entire estate planning process. You might consider one whole life policy and another term policy that will boost the payout if you die within the next 20 or 30 years.
It is advised that, unless you are well versed in the life insurance market, you should employ an independent broker to help. Independent brokers deal with several companies and can find the company that will offer you the best deal for your circumstances. They will often be able to offer you deals that going direct to insurers will not, though the opposite is also true. A broker like Active Brokers will be able to look at the market in more detail, and will be able to help you understand the offers better.
Cutting Inheritance Tax
When your family receive your inheritance, they may also be liable to inheritance tax, which could take a good chunk of it. However, there are things that you can do to make sure that your dependents get the payout with the lowest tax charge.
Tax laws vary from country to country but generally if you put your life insurance in trust , then your cover is no longer yours, and therefore not included in your estate when it comes to calculating inheritance tax. It also means that the payout does not have to go through probate process with the rest of your assets, which means that your dependents are likely to get it much faster too. But even if you don’t put the policy ownership into a trust you should be sure that the policy beneficiaries are properly named so the money goes directly to them and to your estate as beneficiary.
Depending on the value of your property and any investments that you may have, up to 40% of an insurance payout could be taken by the taxman if your policy is not written in trust. However, make sure that you talk to your insurer, as this may not be appropriate in every circumstance.
Note: On January 1, 2013, the American Taxpayer Relief Act of 2012 was passed which permanently establishes an exemption of $5 million (as 2011 basis with inflation adjustment) per person for U.S. citizens and residents, with a maximum tax rate of 40% for the year 2013 and beyond.
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