Finally, a good deal on life insurance, but as always, there are conditions.
If you start a new pension plan after April 6, 2006, and pay for life insurance at the same time, you can use your tax allowance for pension contributions to lower the cost of your life insurance. This means that if you're a standard rate taxpayer, you'll get a tax break of 22% on your life insurance premiums. If you're a higher rate taxpayer, you'll get a tax break of 40%.
The pension provider will automatically cut by 22% the amount you pay for your pension and life insurance premiums together. But if you pay tax at a higher rate, you'll need to claim the rest on your self-assessment tax return at the end of the year to bring your relief up to 40%.
But it comes with three conditions:
- The company that gives you your pension must also give you life insurance and take one payment for both.
- The total of your pension and life insurance premiums can't be more than GBP215,000 per year.
- Your pension fund and the amount covered by your life insurance policy must not be worth more than GBP1.5 million when added together.
In reality, the money you save on your life insurance won't be as much as you might think. It's because the underlying premium for the life insurance cover will be a bit more expensive than a stand-alone policy with the same company, and it's likely that the insurance company providing your pension policy won't be the cheapest on the life insurance market. Also, you can't buy a policy that includes both a pension and life insurance online. This means you won't be able to take advantage of the lower prices for life insurance on the Internet.
Still, if you pay a higher tax rate, your tax savings will make sure that your life insurance is a great deal. If you pay the standard rate of tax, you should do some research. Get an online quote for life insurance before you buy it so you can compare it to the price you'd pay if you bought it with your new pension.
You also need to know a few other things. First, you'll want to know if you can turn your current life insurance policy into a combined pension purchase. No, that's not true! You can only get the tax break if you buy your pension and life insurance at the same time from the start.
Second, the life insurance coverage is only for the person who owns the pension policy. No one else can be added to the life insurance policy. Joint policies aren't available as a pension/life insurance package.
And while many people add critical illness coverage to their life insurance, you can't do this if you have a package that includes both a pension and life insurance. Critical illness cover gives you a lump sum that is not taxed if you are diagnosed with a serious illness on your policy's list. You'll have to buy a normal stand-alone policy if you want coverage for critical illness.
Lastly, a word of caution if you plan to buy a pension life insurance package to replace your current life insurance. You're older now than you were when you first got your life insurance policy. This means that the cost of your new insurance will go up.
Also, the cost of your new policy could go up if you've gotten sick since you first got life insurance. Remember that your premium could go up even if you've just gained weight. In the worst medical situations, the proposed insurer might even refuse to give life insurance at all. You should get written confirmation from your pension company that they will insure you. This will help you avoid being caught without life insurance or being forced to pay a higher premium. Then, you have to compare their proposed cost, after taxes, to your current premium.
