Gocompare.com tackles common life insurance misconceptions and reveals a trick to avoid tax on pay-outs
With life insurance a little discussed and often misunderstood subject, Gocompare.com Life Insurance has revealed the facts behind the myths and exposed the often missed trick to avoiding inheritance tax (IHT) on life cover pay-outs.
Myth: Credit card debts disappear when you die
Unfortunately, debts don’t just disappear after you pass away. If you die owing money on your credit cards, your estate will have to repay your credit card debts before anything is passed on to your beneficiaries. This means your creditors effectively get the first slice of any inheritance you leave behind.
If you have no assets, or your debts outweigh the total of your estate, then your credit card provider cannot pursue anyone else for your individual credit card debts. However this does mean that your beneficiaries will not receive any inheritance from you.
Hidden debts can be crippling, as inheritance which is often a life line in times of family loss, can be swallowed up with debts no one knows about. This is can turn into a contentious issue and can drag out the process of your family receiving the inheritance they’re entitled to.
Myth: Your life insurance premiums will increase if you develop a serious illness
Your life insurance premiums are based on your health (among other factors) at the time you take out your policy. This means if you are unfortunate enough to develop a medical condition during your policy, providing you were honest and accurate at the time you applied for your life insurance, your premiums won’t be affected on your existing insurance policy.
Myth: Life insurance does not pay out for suicide
Whether a policy pays out in the case of suicide differs between insurers. However, generally speaking suicide is covered after the policy has been in force for at least one year, but individual policies may vary.
Myth: I should tell my insurer if I start smoking or put on weight
Typically, you do not need to tell your insurer if you start smoking. As your premiums are based on your lifestyle at the time you have taken out the policy, generally you will not need to inform your insurer of unforeseen changes, such as starting to smoke or putting on weight.
That said if you have made positive lifestyle changes to your health, such as quitting smoking some insurers may actually lower your premium. If they will not, and you have given up smoking for 12 months or more, you could consider shopping around for a new policy so that your premium can be calculated as a non-smoker. Always make sure you have appropriate cover in place before cancelling your old policy though.
While it’s unlikely an insurer will drop your premiums if you lose weight or get generally fitter, it could be worth shopping around for a new policy with a cover level and monthly premium that reflects the new fitter you.
Myth: The tax man gets most of a life insurance pay-out
Not necessarily. Though a life insurance pay-out is typically subject to IHT, customers can get around this legally by having the policies written ‘in trust’. This means that the proceeds from your policy are paid into a trust and as such do not form part of your estate when you pass away, which means your family will not have to pay inheritance tax on the money you leave behind from the policy.
Having your policy written in trust is relatively simple to do and can even speed up the process of your family getting the pay-out. Once you set up a trust, it is then managed by a trustee like a family member or a solicitor; however you can still set out how the money is distributed in your will. Usually there aren’t additional costs involved for insurers to write your policy in trust, though some may charge a small administration fee.
Matt Sanders, from Gocompare.com Life Insurance, said: “It’s natural that we don’t like talking about death, which might be why we have so many euphemisms for it, such as passing away, being gone or even kicking the bucket.
“However, it is a very real and inevitable thing which means if making sure your family is taken care of financially after you’re gone is important to you, then it really is worth taking a bit of time to plan for it. Very few of us will say that we plan to end up in A&E or develop a life changing illness, but you can plan for the impact this may have on your family through life insurance.
“We’ve put this list together to help dispel some common misconceptions about life insurance and encourage people to consider the options available to them. We work hard all our lives to provide for our families and life insurance can help ensure that our loved ones aren’t left exposed, or that someone else doesn’t get the money we want them to have, should something unexpected happen.
“Life insurance isn’t as expensive as you might think and can cost from as little as £4.58 a week*. If you have an existing policy that you haven’t reviewed in a while, then it could be worth shopping around to see if you could be getting the right cover at a better price elsewhere, especially if you have made positive lifestyle changes like quitting smoking in the past year."
Gocompare.com has produced a guide on life insurance for beginners.
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Notes to editors:
*Based on a 30 year policy for a 35 year old male non-smoker, with no pre-existing conditions. Cover was for £100,000 with £50,000 independent critical illness cover, decreasing in line with mortgage payments from Zurich. Monthly premium £18.35.