Joint term life insurance

What are the advantages of taking out a joint term life policy with ones spouse?

This is all about tax. Inheritance tax to be precise. Now, tax isn't fun, but any tax capable of being avoided must be more appealing than other taxes. Inheritance tax is one of the few taxes that can legitimately be avoided with a good deal of attention to detail and some forward planning. Make use of all the legal loopholes available to you and you can save or make quite a bit of money.

The first £250,000 of your estate at the moment can be passed down free of tax should you die. This is called the 'nil rate band'. After this amount your beneficiaries will have to pay 40% tax on anything they inherit. So, an example would be that should your estate be worth £450,000, £200,000 will be liable for tax, and your beneficiaries will be stuck with a tax bill for £80,000. There is always speculation before budgets that the chancellor will raise this nil rate band, but it seems that when it happens, it is in small increments.

Many people see £250,000 as a large amount. And assume that they are unlikely to be leaving £250,000 to their family. But you should take a step back and add up the value of every single thing you own. This includes your car, your investments, and most importantly your home. Many homeowners in the South East of England who own anything with 3 bedrooms are extremely likely to overstep the inheritance tax with the value of their properties alone.

However, what you may not know is that there is an IHT loophole called the spouse exemption under which all assets left to a husband or wife domiciled in the UK can be passed on without any tax liability. These assets can be passed on at any time in your life as well as in your death. This only applies to married couples though, unmarried couples, whether co-habiting or not, do not enjoy this loophole.

So, what happens if your spouse dies as well? Well, all you are doing by passing on your possessions to your spouse is deferring IHT, not avoiding it.

So, here is the advantage of taking out a joint life policy with your spouse. Should your estate be worth £450,000, meaning an IHT liability of £80,000, you get a life insurance policy that'll will pay out £80,000 on the second death of you and your spouse. The policy is written in trust, so that on the first death, the surviving spouse inherits the estate without IHT liability, without the policy paying out.

When the surviving spouse dies, the estate is left to the beneficiaries, usually the children, and the life policy should cover the tax liability in full.

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

Life Insurance

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