At last, you can get tax breaks and life insurance. Changes in Gordon Brown's most recent Budget speech led to the breakthrough, but the tax break is only available on a new kind of life insurance policy. You can't get tax relief on your existing life insurance policies.
These new policies take advantage of a loophole in the new Finance Bill. They should help average taxpayers save between 5% and 15% and high taxpayers save around 30%.
But there are conditions! You can't add extras like critical illness coverage to your life insurance policy, and the amount you're insured for must be a fixed amount. You can't have a policy together either. Basically, it has to be a standard policy with a level term and a single beneficiary.
Then there are more rules, but honestly, most people won't have a problem with them unless they are very rich. You can't get one of these special life insurance policies if the amount you put into your pension plus the amount you pay for life insurance each year is more than GBP215,000. Also, if the value of your pension fund plus the payout from your life insurance policy is more than GBP1,500,000, which is the current limit set by the Chancellor, then 55 percent of the difference will be taxed. This calculation does not include traditional life insurance policies.
Tax relief on the premiums is automatically taken out by the life insurance company. This means that when you pay your premium, the standard rate tax relief has already been taken out. If you pay tax at a higher rate, you will need to claim the extra tax on your self-assessment tax return. But once you've told your tax man about your premiums, they should continue to give you tax relief through your tax code.
So why are the savings less than what the tax relief is worth? Well, it's because the tax relief has to be handled by the insurance companies, and the Inland Revenue has put some limits on how the insurance company can work. This means that the basic cost of these policies is a little higher than the cost of regular life insurance, but you should save money after tax breaks.
You should know that, like all of these loopholes, the Chancellor could close the tax relief. Still, it is rare for a future tax change to affect you in the past, so you are probably safe. You could also get a lower tax rate if your income goes down. This would make you save less money.
Most of the big UK insurers and brokers who specialise in life insurance now offer this new type of life insurance. You won't be able to get a quote online, though. You'll have to talk to a Life Insurance Adviser over the phone.
To make things even more confusing, these policies go by different names, such as Pension Term Insurance, Life Insurance with Tax Relief, and Life Protection with Tax Relief. However, they all mean the same thing.
Oh, yes, let me clear up one thing you got wrong. No, you don't need to buy a pension at the same time!
