While protection is well known as a way to insure against the unexpected, its advantages also extend to the unavoidable outcomes in life. But cover is not always considered as a holistic tool for intergenerational wealth planning, meaning that advisers and consumers alike can miss out on the opportunity it presents.
Protection can provide peace of mind, but needless to say there can be concrete benefits, too.
Neil Jones, tax and estate planning specialist at Canada Life, says the most fundamental aspect of income protection is that it can be used to help maximise the money available to beneficiaries.
Jones explains: “When leaving wealth in a will, inheritance tax can, in some circumstances, make HM Revenue & Customs the largest beneficiary of a will. A suitable protection policy can provide the beneficiaries with a lump sum that could meet the IHT liability and the cost of this cover could be significantly lower than the IHT liability itself.”
Additionally, if a person makes a gift to someone else as part of their will, a tax liability could arise on death within seven years following their death. Jones says that in this situation a life policy can be used to cover the tax liability, meaning the gift is not engulfed by a large tax bill.
For Alan Lakey, director at Highclere Financial Solutions, there are two perceivable situations a person might be in when planning wealth for future generations down the line.
He says: “You either have too much money and IHT is a concern, or not enough in which case a protection plan enables repayment of debts.
“With around half of couples not being married, there is a real danger that general ignorance of intestacy rules can result in either IHT being payable on an estate or the survivor having to sell property as a result of no will and poor financial planning.”
Peter Hamilton, UK head of market engagement at Zurich, says while the Office of Tax Simplification is looking at IHT, in the meantime the numbers paying the tax continue to grow.
“There are many ways to mitigate the tax, including lifetime gifting and trusts, but for many, having the funds available to pay the tax via an insurance policy will be an important and helpful option.
“Having the money to pay the tax on death could avoid the need to sell property or other illiquid assets at the wrong time simply to meet a tax liability,” he explains.
As a result, he says more people are looking at passing on assets while they are alive, helping to pay for house deposits, weddings, private education or university fees for grandchildren and in some cases helping to start businesses.
Hamilton adds there are many personal and societal reasons why passing on assets in this way is a good thing.
“One alternative is for parents to maximise personally the use of all the assets they have while they’re alive but use a life insurance policy to preserve the bequest they would otherwise have made.”