A Guaranteed Whole of Life plan

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Hi, I've been quoted €240 pm for a guaranteed whole of life plan to cover any income tax on inheritance for my children. (estate at present worth approx. 1.5m) There is no review of the payments so they will continue until both my husband and I die. We are now in our mid 60s. Has anyone any experience of these and are they considered good value?

Thanks in advance.
 
These can be an extremely good investment provided you can be absolutely certain you will continue to make the payments.
They have no surrender value and therefore there is a cash windfall to the Assurance Company from every plan that is cashed in early.

You should ensure that your children fully understand that the premiums must continue to be paid for the whole of the rest of both your lives however long you both might live...

Working out the potential benefits is relatively easy since you know the following:

Premium which is guaranteed
Payout which is also guaranteed -we just don't know when
Assuming various terms of say 20 years, 30 years etc
You can solve for the interest rate you are being offered

So the sum assured is €150,000 then we can solve for the interest rate as follows;

Term Interest Rate
20 Years 8.535%pa
30 Years 3.35%pa

For illustration purposes only

This is the equivalent annual interest rate that your premium would have to earn on average each year in order to match the guaranteed benefit.

How does that look compared to cash or fixed interest deposits?

Now factor this in.

A bank deposit would also be subject to Dirt at 41% whereas the life policy is exempt from personal taxation so you would need to gross up those numbers to get the equivalent return you would require from a deposit.

20 Years 14.46% Gross equivalent return
30 Years 5.67% Gross equivalent return

€2880pa in premiums for the next 30 years is a total of €86,400. Do you think you might have the best part of €100,000 that you would otherwise have sat on deposit for the next 30 years or more? If so then, it's worthy of further consideration.

However, what alternatives are there?

You could each give each of your children and grandchildren and anyone else for that matter €3000pa and that would also be tax free
You could use dwelling house relief
You could make a gift now and hope that the aggregation date moves forward (currently December 1991)


Risks:



· These assumptions all assume that you are underwritten and accepted at normal rates. If the premium is “loaded” due to medical underwriting the premium will increase and the marginal benefits would decline.


· The policy does not acquire a surrender value at any time and therefore if you fail to maintain the premiums, the policy will lapse with no value.


· The rates and bases of taxation may change in the future.


· I have assumed that the rate of personal taxation of bank deposits or investments funds will remain constant at 41% through the policy term. The actual rate of tax may be higher or lower than this.


· The value of your estate may be higher or lower than estimated in the future and therefore the impact of CAT may vary over time. Equally the levels and bases of Capital Acquisitions tax may change in the future


· There is a counter party risk associated with the Insurance Company


· Interest rates could go higher in the future making the implied return from the policy less attractive relative to bank deposits.


· Inflation will reduce the real value of the sum assured over time unless it is indexed
 
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Wow Marc that's a terrific comprehensive reply and much appreciated.

The amount insured is 150k and given that we are both in our mid 60s we are assuming another 20 -25 yrs on this earth all going well. That amount will not cover the full inheritance tax but our aim is to lessen the burden rather than eliminate it altogether. That would be too costly.

Just one query - what does this mean - "you could make a gift now and hope that the aggregate date moves forward" I'm afraid I don't really understand this. Could you elaborate?

Many thanks agin Marc.
 
I've updated my post to reflect the €150k sum assured.

The aggregation date reflects the way the gifts made in the past are added back into the estate.

In Ireland gifts made after the 7th December 1991 are added back into the estate at the date of death and potentially subject to CAT.

But any gifts made prior drop out of the account and are not subject to tax. Imagine being a probate lawyer? Were any gifts made in the last 25 years? Do you have records?

In the UK a potentially exempt transfer almost always drops out after 7 years.

So any gifts made by anyone in the UK more than 7 years ago are no longer subject to Inheritance tax.

All we can hope in Ireland is that someone notices it's slightly daft having to go back through family records for a quarter of century and that in a future budget the 1991 date moves forward or becomes subject to a statutory annual revision (like in the UK)

That would mean that gifts made today might not get caught by the aggregation rule if the date moves forward in the future to a point after the gift.

It would seem reasonable to hope that should happen but it doesn't mean that it will.
 
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Broadcaster said:
Hi, I've been quoted €240 pm for a guaranteed whole of life plan to cover any income tax on inheritance for my children. (estate at present worth approx. 1.5m) There is no review of the payments so they will continue until both my husband and I die. We are now in our mid 60s. Has anyone any experience of these and are they considered good value?

Thanks in advance.
Click to expand...

Make sure you fill out the Section 72 trust form when you implement the policy. The Revenue have to be notified that the proceeds of the policy are intended to be used to discharge a tax liability, otherwise it forms part of the estate and is taxable.

The guaranteed premium is a must for this policies as you intend to pay the premium all the way up to the second spouse dies. No point in having one that is reviewed every 5 years and becomes unaffordable when you are in your late 80's.



Steven
www.bluewaterfp.ie
 
I wonder what percentage of these polices premiums are actually paid right up until the second spouse dies.

Are the premiums fixed. If not can the premiums double or triple at review.

Didn't the Taoiseach say in the last week he was looking at inheritence tax thresholds.

What potential tax are we talking about currently for each child.
 
The premiums are fixed unless you choose to index the benefits, but then the premium increased by a fixed amount each year too. There is therefore, no review of the premiums at any time.

Couples who take out these policies do it as a tax planning exercise for the children. They have the money to pay the premiums so the cost of cover does not effect their lifestyle. It is in effect spending some of their children's inheritance now to reduce their tax liability in the future.


Steven
www.bluewaterfp.ie
 
Thanks again for the advice Marc and Steven.

I am advised that our premiums will not increase - actually that was the first question I asked given the recent controversy over premiums mentioned on Liveline. I wouldn't take this insurance out if there was any prospect of an increase. Yes, we could have considered just saving the 240 pm over the next 20 - 30 years but even then we wouldn't have 150k saved in 30 yrs so it would seem a good option at this stage. Will remember too the need to fill out Section 72 form.
Hopefully, Marc and Steven's advice will be of benefit to others here too.

Thanks again.
 
How do the insurance companies make money on these products? They can't be paying out on them all.
 
The profit margin is factored into the premium being charged (you can't just look at each policy on a standalone basis, you need to factor in their whole book, some of which they'll lost out on, some of which they'll make big profits on).

Maybe some of the actuaries who post on here can give a explanation of how an insurance company can make money on whole of life plans?


BTW, Zurich Life and Irish Life are the only two companies in Ireland who offer the guaranteed whole of life product.


Steven
www.bluewaterfp.ie
 
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