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Life insurance for larger sums insured

Life insurance for larger sums insured

01/10/2016

The number of millionaires in the UK has increased by 41% over the past five years : There are now 715,000 millionaires living in Britain compared with 508,000 in 2010, with London having the highest concentration of wealthy individuals. Put another way one in 65 adults is now classed as having a seven-figure fortune: for many of these the value of their principal residence will be their main asset. 

Not all of this population will be part of what financial services organisations call “High Net Worth” some may be merely part of the “mass-affluent” but the reality is that there are a lot more people who now need significantly higher sums insured whether to mitigate exposure to inheritance tax (IHT), provide security for their family or cover a risk to a company or corporate investor. For all of these situations life insurance is an essential tool and one that is likely to become increasingly important as the government cracks down on opaque financial products and complex structures. 

The starting point for cover whenever a large sum insured is required is to understand what the background is and to be able to explain the story simply. Once the insurer understands the high level situation then analysing the details of the risk is remarkably similar to more standard cases.  

A typical case would be Mr N, an ex-pat working in the middle east and wanting £5m of death in service cover, he earns £1m per year and the standard employee package is for 5x salary cover æthat’sæ it - financial underwriting done subject to a letter from the HR department. As far as medical underwriting is concerned, this is the same logical process; we would always want GP Report, Blood tests and medical examination. For larger sums insured, as for Mr N, the only additional requirement there would usually be is for an exercise ECG. So medical is straightforward and easily arranged with costs covered by the insurer. Being realistic the problem when you are dealing with HNW clients is that sometimes they can be difficult to get hold of and that is why robust contact details are absolutely crucial but apart from that the process for covering £10m is more or less the same as that for £500,000. The advantage of using specialist providers is that they can be more flexible and responsive to a client that is demanding and are used to structuring terms exactly as the client requires including where the client needs sums insured to be defined in a currency other than sterling. 

Individual life can be purchased either by the individual or by their employer, in the latter case the benefit would usually be paid into trust for the benefit of the employee’s beneficiaries. 

If cover is bought as part of a shareholder protection scheme with a cross-option agreement in place, then the life cover will pay out to the company to enable them to repurchase the shares or compensate an external investor. As before the financial underwriting is straightforward so long as the company valuation is based on audited accounts. Medical underwriting requirements will usually be simplified unless there is anything specific identified in the proposal. 

In certain high value cases the liability being covered is at arms length and it is not possible to get confidential medical information or even a proposal form. Despite the large sums insured it is possible to secure cover. In a recent case we needed to protect a tour manager’s liability that would arise if a member of a pop band were to die during their global tour. The band was slightly older and had some history of partying so we added a suicide, drugs and alcohol exclusion. We were able to carry out basic due diligence based on public information and we did require the manager to confirm that he was not aware of serious health problems but confidential medical information and tests were not required. Of course, this does come at a price and terms on this sort of risk would typically be up to 4x the usual rate. 

Senior executives between jobs or waiting for new cover to be put in place can sometimes require short-term or interim cover to be put in place quickly, to ensure a mortgage is covered or to ensure that their family would have immediate access to cash in the event that the worst were to happen. In this situation, we would always require a proposal form but would not require any medical exams or tests. We would charge a fair pro-rata rate to reflect the cover required. There would generally be a loading to reflect the lack of supporting evidence. 

Of course one of the main reasons for purchasing life cover is to protect against inheritance tax liabilities.  

Following the changes in the Emergency Budget in July 2015 the government has made it easier for married couples and civil partners to pass on assets worth up to £1m free of IHT. Currently IHT is payable at 40% on all assets above £325,000. Married couples and civil partners are entitled to double the allowance before any tax is due unless a deceased spouse has already used their nil rate allowance. 

From April 2017 the Government will add a “family home allowance” which from 2020 will allow individuals to pass on assets worth up to £500,000, including a family home, without paying any IHT at all. For married couples and civil partners, the total amount that they can therefore pass on without the taxman taking a cut will be up to £1m. The additional allowance will be gradually withdrawn for estates worth more than £2m. 

Insurance offers two simple solutions to help families mitigate their IHT exposures:
- Term life, in particular for gifts inter vivos, and
- Whole of life 

gift inter vivos is free from inheritance tax as long as the person making the gift lives for at least 7 years hence why these are also sometimes referred to as Potentially Exempt Transfers (PETs) and in practice IHT liabilities reduce quite quickly according to the length of time between the donor’s death and the date the gift was made. GIV life policies reflect this reducing exposure: 

How long before death of donor was PET made?

Percentage of IHT payable

0 - 3 years

100%

3 - 4 years

80%

4 - 5 years

60%

5 - 6 years

40%

6 - 7 years

20%

A term life policy to cover a potentially exempt transfer can be a “no-brainer”. You have been given a gift, which may be worth significantly less than you expect because of IHT and insurance offers you a way to hedge that exposure for a fraction of the potential cost; why is this cover not more or less automatic? That is a good question. In the past there has been criticism that some GIV policies were expensive and overcharged insureds compared with standard life policies. That is valid but insurers are certainly now aware that GIV premiums need to be accurate and so they are rated carefully to ensure that premiums are fair. The other reason is that I think many people do not understand how simple and easy these policies are and how effective they can be.  

These sorts of coverages are widely available in the standard market, particularly for insureds up to 75 but specialist options exist for older clients and also those with health issues. We had a case of a European lady in her mid-80s who was re-arranging all of her tax affairs and needed around £5m of cover for 2 years. We were able to provide her with absolute certainty for a premium of around £100,000. Yes, a large premium but one that bought a full guarantee for her estate’s potential IHT liability. It is also a good example of how these simple products can also be very valuable to an advisor as well as an assured. 

As far as age is concerned the key issue is affordability: so for someone aged over 90, premiums are likely to outweigh the potential benefit but for clients in their 80s in reasonable health, a specialist should be able to provide cover. As far as health is concerned, the key issue again is affordability: sums insured, term and the conditions being covered do all play a role too. 

Whole of life cover is more expensive, to reflect the guaranteed payout, but is an extremely effective way of reducing the size of an estate and passing money on to one or more beneficiaries. In particular, whole of life policies can be valuable where assets are tied up in property, shares or other illiquid assets: the rich are often asset rich and cash poor and insurance can be a very effective way to address this. 

Inheritance tax insurance is bought in the context of overall estate planning and appropriate advice does always need to be taken. Nevertheless, life insurance is a simple and effective way to mitigate exposure to IHT, provide security for a family or cover a risk to a company or corporate investor and, unlike many of the complex trust based products on the market, it is a easily understood by the public. Life insurance, particularly for wealthier and HNW clients deserves to be used much more often than it is. 

With special thanks to Sue Clark, Senior Life Underwriter at Lloyds Syndicate 779.