Insurance World

Variable life insurance offers the ultimate in life insurance flexibility. The main principle governing variable life insurance is that you control your life investments instead of the life insurance company managing them on your behalf. This enables you to select the level of risk that you subject your life insurance fund to, paving the way for you to make substantial interest gains on the cash-in value of your life insurance policy.

How does variable life insurance work?

All life insurance products are a form of investment vehicle. Standard no cash-in value life insurance policies like term life insurance invest life insurance premiums in ultra low-risk funds that are often obliged to return a certain level of interest. This provides the life company with confidence in receiving a tangible level of return, which is transferred through to the life insurance policyholder by way of a guaranteed lump sum payment upon death or terminal illness.

Variable life insurance is different from standard types of life insurance as the life company hands the investment reigns over to the policyholder. The life company may allow a percentage of the fund to be invested, or in some cases, all of the fund to be invested by the policyholder. Variable life policies come with the disclaimer that the life insurance company takes no responsibility for the performance of the variable life policyholder’s investments. Therefore, if the investments perform poorly the policyholder accepts the consequences that there will be little or no cash surrender value when the insurance is redeemed.

Is variable life insurance for you?

It is very important to think long and hard about variable life insurance before opting to take it on, as there is a high level of risk involved with this type of life policy. Ideally, variable life policies should only be taken out by seasoned investors who know there way around the investment markets. If you’ve never invested in the stock market before then a variable life policy is probably not for you.

However, if you are confident in your investing abilities this is what you stand to gain from taking out a variable life policy…

1. Variable life policy potential:
A variable life policy has the potential to make substantial interest gains that are much higher than on a standard term life insurance policy. Whereas you might pay a small premium per month for a Ј100,000 pay out upon death with a standard policy, if you invest well with a variable life policy that Ј100,000 could be worth Ј500,000 or more when redeemed!

2. Tax advantages:
The cash surrender values of variable life policies are exempt from taxation until the point at which they are redeemed. Also, gains made via variable life policies are not subject to capital gains tax (CGT).

The recently over 60’s are the post-war baby boomers. Their insurance needs are very different from that of a young family or someone just starting out in their first job.

A typical 60 something couple will have raised their family, finished paying off their mortgage and are into or nearing retirement. More and more of this age group of people spend part of their year abroad or maybe are planning to move to the sunshine on a permanent basis.

Maybe it would be a good idea to assess their insurance needs at this stage in their lives. Something that is almost certain to crop up is the worrying matter of inheritance tax. House prices have risen considerably over the past years and the family home that suited their lifestyle some years ago will probably be worth an amount approaching or over the inheritance tax limit. Even if they downsize their property, they may invest in something like a holiday home and the actual capital is still there.

Inheritance tax is charged on taxable estates with a value of more than Ј300,000 in the 2007/8 tax year. This amount rises annually – 2006/7 was Ј285,000 for instance.

To work out the value of their estate, they will need to take the value of their home, savings, investments, life insurance policies, any business interests and any other assets which they have accumulated. When the total of this has been reached, any liabilities will need to be deducted. Typically this will be any mortgage outstanding, loans and other debts. The remaining figure, less the amount exempt from Inheritance Tax is the one that Inheritance tax will be calculated from.

Inheritance tax would be charge on the death of the second partner. There is no inheritance tax between spouses.

To put it simply, if their estate – their assets minus their liabilities - is worth around Ј400,000, then using the 2007/8 allowance of Ј300,000 there would be Ј100,000 which would attract a tax of 40%. That’s Ј60,000 to their beneficiaries and Ј40,000 to the taxman.

You may think this is a fairly large estate, but do consider what your home could be worth at today’s values.

Now this couple may be quite happy to potentially give Ј40,000 of their hard earned money away, but we think probably not!

The couple would be advised to take some specialist advice at this stage, but a solution could well be to take out some whole-of-life insurance cover. An amount that would cover the estimated inheritance tax bill would relieve their beneficiaries of any worries when the inevitable time comes. The policy must be written “in trust” and the result will be that the payout will not be counted as part of the estate. By using this important proviso, there should be no delay in the payment of the policy to beneficiaries.

Most policies designed to help with inheritance tax dues are investment linked and offered on a reviewable basis. The plan will be reviewed at five or maybe ten yearly intervals. If the investment part of the plan has not performed as hoped, then the cost of the premium could rise and our couple need to be aware of this.

For an easy way to get some advice on this important subject, an on-line broker will be able to steer our couple towards the right product for them, at the right price.