Kathryn Knowles  00:15

Hi, everybody, we are on season nine, episode seven. And today is going to be focused on inheritance tax planning and protection insurance. This is the practical protection podcast. Now I want to start everything off as always with certain caveats. So the biggest caveat that he’s put on this is that I am not a full financial planner. So I am not talking about full estate planning, financial planning, or anything like that, that is absolutely something that you would need a full financial planner to be doing. I’m here to talk about the protection insurance side of things and how we’ll be doing it. And some very, very, very basic backgrounds in terms of IHT and what that means, where it comes into, and things like that. But so say, I’m going to be even though it’s HTS, obviously a complex area, I’m just going to do the easiest version of the IHT side of things that I can. So essentially, inheritance taxes do when a person dies, and their estate is over a certain value. And basically, the government says all that states quite nicely large, don’t think you family need that give us some tax kind of thing. And that’s in they actually do say that, but that’s kind of the way I take it anyway.

So I’m going to be talking about the how we will be looking at the insurance to protect against that inheritance tax. So what we’re doing is basically saying like, what if the government’s wanting to take that on is wanting us to pay that out of the estate, then kind of put an insurance in place to one pay that tax bill, because sometimes our estates can be set up in such a way that it’s not easy to pay the the inheritance tax straightaway. And then you need to be able to pay that to, in a sense, release the estate to the family. So it can be quite tricky. So we’re going to use insurance for the first thing to be able to pay the inheritance tax, but then also, it means that we’re keeping that value ourselves, it’s not being lost in into the taxation. So we’re looking at things very, very basically, each person, and each adult in the UK has, you know, £325,000 of allowance that they can have in their estate before inheritance taxes do. If you’re a married couple, you can combine this, there’s no inheritance tax between couples. So when you have a couple, their inheritance tax allowance for their joint estate is £650,000. So as to say though, there isn’t any inheritance tax between couples. So if your estate is over that value, that is just moved over to the other part of the surviving spouse inherits it. But essentially, you know, if it was to go to children of somebody else, then that’s when that £650,000 limit comes in.

When I’m saying this, again, because very caveats in the fact that I’m not a financial advisor. And this is assuming that there’s no financial transfers that have been done that have affected this nil rate bounds, which is the inheritance tax threshold, and that a person has within the UK that there can be things that can eat into that. But that’s, that’s beyond what I’m going to do in this short snippet, a podcast episode. So as well as that we all have this thing and £325,000 each or £650,000, together as a married couple, we can potentially get about £500,000 for single person or a million pound for married couple. And this is true at the moment when I’m recording this, in the middle of the middle of 2024. These things can change as governments change and different things and processes come into play.

Now the reason that we can potentially have that extra is if you own and they have in your main residence in the UK, and it has a value of £175,000 or more, then they will sometimes allow you to use that and give you that extra allowance to basically say, Well, you’ve you’ve got this home, it’s yours, this is your value, this is the value in everything that you can have, you know, as a bit of an extra towards your threshold, which basically means that we can up that that nil rate band for people for larger estates. So quite significant estates, that alarms can change quite a bit once you reach certain levels. But again, I’m just focusing on the very basic situations here. So in terms of inheritance tax is applied at 40% of anything over a person’s nil rate band, and you should really speak to a financial advisor who can calculate everything precisely for you. And I’m aware that they’ve got certain magic, mystical things that they can do with financial products and different things to really work at reducing the IHT bill as much as possible. So how would we do it basically for the insurance so for a single person, we would be looking at a life insurance policy that is whole of life, which essentially a hole of life insurance policy does what you would expect. It just keeps going for however long your life or it will just keep going and going and going.

A lot of life insurance policies in the UK I’ve noticed term life insurance policies of people who’ve got a mortgage. So 30 years, they put life insurance in place for 30 years, that’s often a term life insurance policy, basically, meaning that there’s a specific term to it, it will end at some point. So whole of life just means we’re going to keep going. For a single person, I’ll just say you would do a single life insurance policy for that, for a married couple, we’re going to do joint life, but second death, whole of life insurance. And so when is the single person life insurance policy is going to pay out when they die for married couples, when it’s to do with inheritance tax liability, because there’s not the inheritance tax doesn’t come in for a married couple. And so both passed away, we’re going to do joint life second death. And that is much cheaper than doing joint life first death. And there are certain things in the background with the financial side of things and where the payments are made. And in terms of the risk side of things as to why that’s the case, but it is just the case. So essentially, that is what we’re going to be doing. For a cohabiting couple, we’re going to be looking at single policy, so each of them would need to have a single policy. And again, we would do it on a whole of life insurance basis. And that’s just because there isn’t the same protections in place for people who are cohabiting in regards to that transfer of estate and the nil rate band, it is unfortunately only able to be transferred between the married couples at the current time. So when we set a pile of life insurance, there are other things that we can do as well. But it’s the thing we really really want as a whole of life insurance wherever possible, we can look at guaranteed versus reviewable premiums. Now, reviewable payments are incredibly tempting, and they are significantly cheaper. And I’ve got an example that I will give you on this significantly cheaper than the guaranteed options and are usually significantly cheaper for quite a bit of time. It all depends upon how old you are when you set these policies up. But they’re often say usually, you know, going on for for for quite a while they will be the better option.

The problem is with the reviewable premiums is that when you start to reach your late 60s or 70s, the premiums go up phenomenally, and I will say give an example of this coming forward to the point that eventually, it just becomes unaffordable for the majority of people to be able to keep paying the premiums are just such a shame. And I do speak to quite a lot of people who come to me and sort of say, well, we’ve set up this reviewable haul of life insurance policy when we were in our 30s. It’s this much value, we’ve just got the renewable premium, and it’s doubled. And, you know, can you do anything better? And the difficulty is, is that you know, a lot of times people now have seen their 60s or something. And if you are looking at the guaranteed premiums at that point, they’re probably going to be triple what they’re paying reviewable wise now, because the guaranteed is never going to change the insurance stuff like saying, right? Well, instead of increasing it to this, when you’re this age, we’re just going to say this amount, and you just pay it forever.

So it’s, it’s always very, very tempting to go for the reviewable premiums. But when you look at those there is usually a projection for the next 10,15 and 20 years to let you know what those valuable premiums are going to change to unfortunately, can’t really predict too much after that time. And it’s worth just showing them to people and the example I have will explain why we’d want to show them to people as a just in case, especially when we start to get start to get older, when we’re when we’re younger in our 30s 40s 50s Maybe not so much the 50s with those some 40s Those reviewable premiums, they’re not going to look like they’re going to jump much at that 20 year mark. But it’s because of the fact that given their age, it’s the 25 year and 30 year mark that are really going to stand up for those premium changes. So I say we will be doing whole of life insurance. But we can potentially and this comes down to your compliance and what you feel comfortable with as a as an individual advisor. And but sometimes it can be a case of is the client better to have some protection in place than non and that comes down to each advisors individual opinion, your compliance officers opinion, but here’s just some ideas.

So you could always do a joint life second death term policy to age 90. Now that will be much, much more affordable than whole of life insurance. You know, people are saying to the whole of life insurance? Absolutely not. We certainly can’t afford that. The age 90 version will be phenomenally cheaper, because of the fact that we are taking away significant amounts of risk to the insurer because the whole of life is pretty much you know, assuming that the person has been truthful on their application that they keep up to date with their premiums. That is pretty much guarantee is one of the only times that we can say this is going to pay out because it’s going to keep going forever. I mean, I do again caveat that with they must have been truthful on the application they must keep up to date with it. premiums, things like that. But it will just keep going. So the insurer is when they’re assessing the premiums for that they’re not really assessing a risk of oh, is this person going to survive past age 90, it’s just a case of, well, they are and we’re going to be, we’re going to be paying this out.

Kathryn Knowles  10:16

But then you’ve got the joint life second death. So what they’re then doing is the risk to insurance actually reduced because the same Well, if they do live past 90, and many people do now, then this policy stops, and we’ve had all these premiums, but obviously, we’ve not to make the payout. So actually, we can charge a lot less. So it is sometimes worth just having a look at that seeing what their pricing is. And depends upon the client’s situation, their budget, what you’re doing with them in the background, different things like that, especially if you’ve got a financial planner in the in the works, you can hopefully do something where we don’t need to resort to something like a giant knife second death to age 90. However, it is just worth bearing in mind that that can be possible. And there is also and this could be something that happens by mistake, hopefully, by mistake, somebody’s doing joint life first death, that’s really not ideal one is more expensive than joint life, second death, and it’s not going to do what you’re expecting it to do. And if especially if you did it as joint, it’s going to automatically pay to the spouse unless they unfortunately both passed away at the same time. And we don’t want that happening, because it’s just going to add to the state is going to increase the IHT bill. So it’s actually we’ve done significantly worse for our clients.

So if we do see somebody, there’s a joint life first death option there is meant to be there for inheritance tax planning of some sorts, you know, then that’s something that we’d really need to be addressing and trying to resolve. Joint AI first death generally, is used for things like mortgages, which began that’s that’s what the therefore one of the partner dies, the other one gets the money can pay off the mortgage, or do something else with the money if they feel that that’s better. But that’s for that situation, it’s it’s not when we’re looking at the inheritance tax, something extra to just be really a couple of extra things before we go into the case studies is to really keep an eye on the terminal illness benefit, too. So terminal illness benefit can sometimes be paid. So basically means with most insurance, if you are diagnosed with 12 months or less to live, then the insurer will pay the money to you sooner, because they want to make sure you as comfortable as possible. Now, again, on the HT side of things, that doesn’t help in terms of what the initial plan was. So we’ve got you know, somebody they are terminally ill they’re going to potentially claim on a terminal illness benefit. Well, let’s say they get the benefit paid out. Unless they use all that money up. Again, we’ve just added to the estate, but we’ve also lost all the protection against the tax bill that we are going to be expecting. So we really want to avoid that, if possible. So in a sense not to make a claim on it, and and just obviously wait for for what things are what happens. There isn’t really tricky thing that’s happening, though. And there was it’s been seen some times where HMRC have now because obviously HMRC who do all this in one full taxation side of things to us. And they have sometimes looked at these policies after a claim after a claim for somebody’s died. And they’ve said, well hang on a minute, this person has a terminal illness. And the people say yes. So they could have claimed have a terminal illness policy aspects of it when they’re alive. But the answer is, possibly. And I’ll explain that possibly in a minute. And then HMRC have gone. So this should have paid out, it should be in the state.

So we’re actually going to take into account your fullest state plus this money that should have paid up for the insurance policy first. So we’ve not just increased the estate, we’ve also increased the state potentially by the sum assured of the life insurance policy as well. Now this is a really, really tricky one. And it’s something that there was significant arguments against but it’s it’s, it’s hard to know how much you can argue against somebody like HMRC. And the reason I say so hard is because terminal illness benefit is incredibly hard to claim on. Because a lot of the time it is to do with cancer claims. And you do not get an oncologist who will say this person absolutely has less than 12 months left to live. In terms of that I say you don’t get that if you had somebody who it was a very, very late diagnosis and it’s they need to immediately go into respite care and it is very much like There’s weeks rather than months and obviously the oncologist could potentially say that. But we do tend to find that quite a lot of terminal illness claims are postponed. And it’s very, very hard to get the data on that it’d be really interesting if any insurers can share some data on that side of things. And but yeah, it’s really, really hard because they postpone it. So they don’t decline the claim they’re postpone it. So it won’t sit in any of the usual statistics that we see the insurers share in on an annual basis. And they postpone it for a while we maybe will pay out on the terminal illness. But it’s we’re not sure that they definitely have less than 12 months left to live. And, you know, it’s very, very hard to get a specialist to say, without a doubt, absolutely, you will, you will have less than 12 months left, because obviously, there’s always medical changes, as always trials, there’s so many different things that can happen. And with some cancers, now, there are times where it is an incredibly intense cancer is seen as terminal, but people can live for quite a while.

So that is really, really tricky. And I’ve even been seen a situation myself, where an insurer or an oncologist had said, to the insurer, this person has this much left to live. And the insurer had turned around and said, unfortunately, it’s it’s beyond belief, in a sense, but the show at the time had turned around and said, We don’t believe you, we think we’re just you’re just trying to help this person get this payout, which is is ridiculous. But so we’ve got this really weird, difficult situation here. And I’m hoping coming back to a point where people can follow my train of thought I do go off on tangents. So we’ve got potentially HMRC, saying that he should have claimed on a terminal illness. So we’re going to take that into account. And then you’ve got insurers who are pretty much saying, well, we’re not going to pay out terminal illness until you can absolutely say this. And so it’s really, really hard because they have, there have been instances where HMRC have said that we feel you should have been able to claim on it. Which is of course, very, very tricky, because that sits what the oncologist says what the insurer was saying, and then what HMRC are, are kind of feeling themselves. So it is really tricky. When it comes to terminal illness benefits, it’s not to say that there’s a, it’s unlikely that we would have you know, these situations in in, in in quite a lot of the time. Because you know, say in terms of medical advances, it is you know, less likely that people will be diagnosed as terminally ill there are certain medical conditions aside from cancer that could specifically lead to that situation.

And but it is just something to be incredibly mindful of another thing, just the result, snippets and bit of a tip when you’re looking at these things, and just to make your website go to the case studies and then wrap this up, is that you might look at the joint knife second death cover, and you might look at it and know straight away or realise a little bit down the line that one of the couple is declined, that they’re not going to get insurance based upon say like their medical history or their sports or something like that. Joint life second death is rather brilliant in this way. And the reason is that with joint life second death, they kind of in a way ignore the first person because it’s all about what is the risk of backwards risk of both people dying, but what is the risk of the least likely person to die to die. And that’s what they focus on a lot of the time. So if we have somebody who is declined, insurance with the insurer, you do the application don’t have second death. And one of them’s declined. The other one isn’t, they actually both are still covered by the insurance policy. And the insurance does it in a different way. So what they essentially do, and without trying to sound too blase about it or anything, the person who is the higher risk that they said they can’t insure, they kind of make the assumption that they are going to pass away first. So that they kind of, in a sense, ignore them

Kathryn Knowles  18:45

in terms of coming into a transition to say that again, coming to a decision that’s right, about the pricing. And so what they then do is, and I had this for people not too long ago, is that they will say right, okay, so you’re applying for two people. And don’t have second death is obviously much cheaper than one person applying for for a whole of life policy. But the so the insurer just goes right over C prime for two people, one of them, we can’t insure in themselves, in a sense, but under the Joint life, second death, we’ll insure them, but what we’re going to do is price it as if the other person has applied on their own. So essentially, it becomes the pricing becomes a single life pricing that goes forward with insurer and I’m sorry if this is incredibly technical and confusing, but essentially, what they’re doing is they’re just they’re taking the assumption that one person is going to die first. So they’ll they’ll include them in insurance because they’re assuming that they’re dying first. The other person is the one that they’re they’re really ensuring because they’re the one that you know that they’re looking at their statistics in terms of health and age and everything and putting the price together for that. So if you are in that situation Somebody seemed like they’re not going to get covered don’t don’t ultimately think right? Well, that said, we’re just not going to get them covered.

The joint life, second death can be really, really beneficial in this kind of an instance. So let’s have a look at some case studies and the pricing, the first one I want to show is just potentially the benefit of looking at something like this from quite early on. So I did some cover for some people. And they were sort of mid to late 30s, were doing 100,000 pounds of inheritance tax protection, we did it RPI linked, because you know, why not? And obviously, 100,000 pound now in their 30s is very, very different to the value of 100,000 pounds when they’re, hopefully run into their 90s and living, you know, good more 60 years or so. The price for that was 64 pounds and 76 pence per month guaranteed as a joint life second death. There are arguments at such a young age, is that really, in a sense, worthwhile? Because of the fact that we’ll how many years would it take for me to pay that in to have actually just put aside, you know, 100,000 in a bank? Well, yeah, potentially, you could consider it that way. But it all comes down to you know, when could these people potentially die no matter what there is, you know, it’s keeping this away from the estate, it’s, it’s making sure we are covering that potential inheritance tax liability. And also, when we do get into those later years, that pricing is not going to be available at that at all.

So I’ve got a couple of case studies to share with you this summer showed is very different. So I do appreciate that we can’t go like for like on the premiums compared to those people in the 30s. But I just wanted to obviously share it and it is from people I’ve done some quotations for. So people in the mid 70s, wanting 500,000 pounds of life insurance to cover their IHT bill. Now this because when we go to the guaranteed interview or premium, so guaranteed premiums for this couple 1300 pounds per month, which is definitely a premium, you know, it’s it’s certainly not small premium. And it is something that we want to be very, very mindful of. And, you know, I know that financial advisors will and financial planners will go in and do lots of calculations as to whether or not it’s worthwhile doing that or saving it or doing something doing different things like that. But the main thing here is to show the difference between the guaranteed and reviewable, just so you know, to keep an eye on this, and it’d be very important to make your clients aware of this, either which way you should really let them know the guaranteed and the reviewable options and the reviewable projections. So I’m guaranteed 1300 pound per month on reviewable, we start at 737 pounds a month, I don’t think anybody would ever look at that and go, I’d rather have the one that’s almost double the price, please. If you look at them side by side, you are gonna want the one that’s half the price everybody would want to, but we need to be very certain as to what that means going forward. So the 1300 Guaranteed is the price that is going to be and that is going to be what it continues to be that is just going to carry on doing what it’s doing. The 737 pounds per month review boiler is going to change.

So in 10 years time, so I do appreciate we’ve got 10 years worth of you know, half the premiums, that’s quite significant amounts. But in 10 years time those premiums go to three and a half 1000 pounds. In year 15, they’re gonna go to 7400 pounds a month. And in year 20. If they both live, as we would hope well into their 90s, the premium is going to become 11,800 pounds per month in terms of doing it in a reviewable way. And that’s obviously something we would significantly want to avoid, obviously, people reaching that age for this couple with that being the mid 70s. You know, not everybody does reach that age, quite a lot of people do. But at that point in our life, we’re probably in terms of the premiums, we’re probably going to be wanting to use that money far more towards probably care and support rather than spending it on this kind of insurance. So whenever we’re doing this from a compliance point of view, from an advisor, financial planning point of view, everything like that, we need to really make sure that we are showing us guaranteed premiums, we are showing the reviewable and how they’re going to change and explaining obviously, the pros and cons to both because there isn’t a right answer. There are pros and cons to both of these. And just be very, very mindful.

And like I said before, you know, I do speak to a lot of people now in their late 60s 70s really wanting to lock those premiums in place that don’t want them to keep increasing. And unfortunately, it is going to keep increasing because if we do guaranteed premiums now it’s often at least triple what they’re seeing on their reviewable and that’s just going to keep in it’s almost getting into like a bad cycle of, of wanting to like not pay more, but eventually those those premiums are going to become quite astronomical for people. Okay, I hope that’s been helpful. Thank you for listening everybody. I hope you’re finding these like shorter snippets sessions useful and obviously any questions or any thoughts that want to share with me please always feel free to do that. You can visit the website practical hyphen protection dot code at UK to see all the backlog and you can access as on all major podcasting platforms. And on the website. You can also claim a CPD certificate on the website too. Thanks to our sponsors, the octo members. Thank you, everybody. Bye