6) Life Insurance, Death Benefits, and Nominations.
Life insurance is often taken out with the death benefits being paid to the life assured. Quite how a dead person is expected to benefit from it, we’re not sure. Not only that, but two other groups of people will benefit from your thoughtfulness before your family get any benefit.
- Lawyers like us – because just having the life policy in your estate may mean that the full probate process will need to be undertaken. This will typically result in significant costs and delays of between 3 and 12 months. This often from policies purchased to pay funeral expenses which actually cause more expense than they save.
- The Taxman, because the insurance policy is part of the estate, and – at todays rates – could be taxed at 40%, which has to be paid before probate is granted, and before the policy can be paid out!
So what is the solution with Life Insurance?
One of the problems these days is that the great god “Consumer Protection” is preventing people from getting advice, and making the market far more confusing than it used to be. But what is usually the best solution is one of the standard trust documents.
Pensions Death Benefits.
If you found life insurance issues complicated, the rules about pension death benefits are complicated enough to fill a decent sized library. And the options and complexities seem to be growing almost daily. Before retirement you may be lucky enough to just need to complete a Nomination form. The same is true of some life insurance schemes. Ask the person who set them up. If it is a staff scheme, your employer may be able to help. If not, you will need to speak to the financial adviser for advice. In most cases the pension company may supply forms but that could be considered advice, so just ask.
Post retirement is a real nightmare these days with a large rang of options and tax issues. You should make sure that your pension is set up correctly at retirement, as there could be tax penalties later on if you want to change anything. Consult a well qualified financial adviser!
But we thought we would let someone who deals with this sort of thing from the other end to have the last word on this section:
David Downie, Technical Manager at Standard Life says
So what is the solution for Life Assurance?
“Most life assurance companies offer a standard trust wording for their policies. Placing the policy in trust can keep the proceeds outside the estate for inheritance tax. It also means that typically the death benefits can be paid out without having to wait for probate to be granted which can help your personal representatives meet any tax liabilities. Many modern life assurance policies may also include additional benefits such as critical illness benefits and terminal illness payments and often standard trust wordings allow you to retain these valuable benefits for yourself rather than hold them on trust.”
Pension Death Benefits
“New pension benefits rules mean pension pots are far more inheritable than ever before. There is now greater freedom on who can continue drawing an income after your death and the tax they pay on pension death benefits has reduced. But prompt action may be needed to ensure your wishes can be met before it’s too late. Many pensions have been around for years – designed with a very different retirement journey in mind and may not offer the new options. Dying while stuck in the wrong pension scheme may mean your preferred option isn’t available and in some cases there may be no option at all. And it will mostly likely be too late to put things right. This means it may be worth seeking advice on whether to transfer benefits to a scheme which can accommodate your preferences if how your pension remaining pension fund is distributed is important to you.
“But even where the pension offers all the new freedoms, it’s important to make sure that pension nominations remain up to date and fully reflect your intentions. The scheme trustees/administrator will be guided by the last instructions they have received when they determine who and how any remaining fund is distributed. So it is vitally important that nominations are regularly reviewed. If changes are necessary, the nomination can normally be changed at any time.”