For financial adviser use only. Not approved for use with customers. Guaranteed Whole Of Life Questions and Answers

Transcription

1 For financial adviser use only. Not approved for use with customers. Guaranteed Whole Of Life Questions and nswers

2 Guaranteed Whole Of Life (GWOL) Questions and nswers 1. What is the Inheritance Tax Threshold (IHT)? 2. Who might be interested in buying GWOL for IHT purposes? 3. Don t whole of life plans leave my clients open to risk? 4. How do the different payment options work? 5. How does the Yearly Increase Option work? How does it compare to the market? 6. When is the extra cover feature applicable? 7. Is GWOL Qualifying or Non-Qualifying? What type of trust could GWOL be placed in? 8. How are the payments treated for tax purposes? 9. How do I get a quote and apply for GWOL? 10. What support does viva offer when applying for GWOL? 11. What other products could I use for IHT planning? The answers to these questions are based on current tax laws which could change in the future. 2

3 What is the Inheritance Tax Threshold (IHT)? Since 6th pril 2009 the IHT threshold has been 325,000. Once someone s taxable estate exceeds the threshold the excess value could be taxed at 40% when they die. This could have the following impact: Taxable Estate (Individual) Estate 40% IHT Bill 300, ,000 75,000 30, , ,000 70,000 1million 675, ,000 5million 4,675,000 1,870,000 The Finance ct 2008 included provisions to allow a surviving spouse / civil partner to use any unused portion of their deceased partner s nil rate band. 3

4 Who might be interested in buying GWOL for IHT purposes? The bottom line is that if you have individual clients with taxable estates above the IHT threshold you should encourage them to plan for IHT. GWOL is one solution for clients wishing to pass on the full value of the estate and avoid leaving tax bills their family may be unable to pay without selling the inherited assets. If GWOL is written under a suitable trust it can help ensure the cash sum falls outside the estate and is paid to your client s beneficiaries quickly. Some clients may not know that the IHT tax bill sometimes has to be paid before the estate can be released, so this can help them to cover the bill and release the rest of the estate. Customer Profiles GWOL could be suitable for those in their late 40s/50s approaching retirement who have not yet started IHT planning. They could have a home with a value that has risen since purchase, low mortgage and some investments leaving them over the IHT threshold. GWOL policy now could be cheaper than leaving it until after retirement to start the policy. Or it could also suit someone in their 60s who may have done some IHT planning already using other products. For example they may have used investment products to reduce their IHT liability and need an affordable GWOL to cover the remainder. Suitability as an IHT planning tool The product features provide the customer with real value and peace of mind. For example - l Extra cover feature allows the customer to take out more cover should a life assured receive a gift of cash or residential property, or if legislation changes, resulting in a higher potential IHT liability. If your client increases the level of cover they require then the premium they currently pay will also increase. The extra cover feature is automatically included under the plan, subject to underwriting. l Yearly Increase option: Cover and premium rise by 5% compound p.a. helping it provide sufficient funds to pay any IHT bill in the future. l No income tax to pay: if your client keeps the plan until the person covered dies, there will be no income tax to pay when the cash sum is paid out. l single premium could be used by someone with a lump sum from, for example, a maturing investment. l Regular premiums could be used to spread the cost of cover, or where the plan holder needs their family to help them pay the premiums. 4

5 Don t whole of life plans leave my clients open to risk? Traditional whole of life plans may have an investment element, leaving the plan open to fluctuations in the stock exchange. Our Guaranteed Whole of Life Plan is just that Guaranteed. There is no investment element so the payouts and premiums are both guaranteed for the entire plan, providing premiums are maintained. There will be no nasty shocks of premium increases to maintain levels of cover. Even when the Yearly Increase Option is selected the sum assured and premium rise at the same rate 5% (compound) each year. The increase percentage is fixed so the client always knows what to expect. Guaranteed Whole of Life is designed for the long term. Because it does not have an investment element if your client chooses the regular premium option there will be no cash-in value at any time. If your client chooses to pay a single premium, there may be a cash-in value. The cash in value will always be lower than the premium paid. 5

6 How do the different payment options work? Quotes are available on 2 different bases single and regular premiums. Each payment option may be suitable for different client circumstances: 1. The single premium option allows a client to make a one-off payment to ensure a guaranteed payment is made on death. If written under trust, whilst the initial premium would be a gift for inheritance tax purposes, any claim proceeds will usually fall outside their taxable estate. single premium requires a higher initial investment, but could reduce the overall cost. It could be used if the client has investments maturing. 2. Regular premiums spread the cost of cover. The premiums are payable until the plan anniversary preceding a life assured s 90th birthday, but they will be covered for the rest of their lives. The exception is when a life assured is aged between 80 and 89 at the start of the plan, in this instance premiums are payable for 10 years. For a joint-life plan the length of time premiums are payable for depends on the plan basis: If the cash sum is payable on the 1st death the length of time premiums are payable for is based on the oldest life. If the cash sum is payable on the 2nd death the length of time premiums are payable for is based on the youngest life. Regular premiums mean the client could ask a member of their family to help them pay the premiums for the remainder of the payment period (but these payments would be gifts for IHT purposes). 6

7 How does the Yearly Increase Option work? Q How does the Yearly Increase Option compare to the market? When the Yearly Increase Option is selected the sum assured and premium rise at the same rate 5% p.a. compound. Because it is not index linked your client always knows what is coming and can plan accordingly. There are products on the market that offer increases linked to indexes, such as the Retail Prices Index (RPI). This adds a level of unpredictability to a guaranteed product that clients seeking total security may find unacceptable. This option must be selected at outset, and is only available if the client chooses to pay regular premiums. The client will be sent confirmation of their new premiums and sum assured each year. The customer is given the chance to stop the increase option, but if they do so, it cannot be reinstated later. The sum assured will continue to increase annually even after the end of the premium term. Where the Yearly Increase Option is selected, why are the premiums initially higher? The initial premium under the Yearly Increase Option is higher than if the option wasn t selected. This is because a 5% growth in premiums is not enough to fund a 5% growth in sum assured. The higher initial premium allows the growth rate of 5% p.a. for both premium and sum assured to be guaranteed throughout the term of the plan. So, even where viva s premium may be initially higher for a certain sum assured, lower premium growth rate could still make us more competitive in the long term. It is common for the client to be able to remove an increase option, but then not be able to re-instate it. Consider if the RPI was to increase by 10%. That could lead to a premium increase of 20% with some products. If the client had not planned for such a rise they may have to decline the increase and lose the option. 7

8 When is the extra cover feature applicable? The extra cover feature is automatically included under the plan, subject to underwriting. If the customer increases the level of cover they require then the premium they currently pay will also increase. It allows the customer to increase cover without medical evidence when 1. life assured has received a gift or inheritance (of cash or residential property) directly resulting in an increase in potential IHT liability. 2. change of IHT legislation directly results in an increase in the potential IHT liability of a life insured. The increase in cover can only be used to protect potential increases to IHT liability and must be taken within six months of one of the above occurring. We would also need to see evidence of the gift(s) received. There s no limit to the number of times this feature can be used, as long as: l Each increase in cover is at least 1,000. l The total amount of extra cover taken out isn t more than 50% of the initial sum assured or 500,000 (whichever is lower). l The oldest person covered by the plan is under 70. The extra cover feature is exercised using a specific application form - application form PT05022 available from the library of the dviser Portal. 8

9 Is GWOL Qualifying or Non-Qualifying? Q What type of trust could GWOL be placed in? viva s GWOL plan is non-qualifying. However you can be sure that under GWOL, despite it being non-qualifying, there will be no gain for income tax purposes. Why, if GWOL is non-qualifying, are there no additional taxes to pay? GWOL policy pays out on the death of the life assured. For income tax to be chargeable there must be a chargeable gain on the policy. The gain on death is calculated based on the surrender value immediately before death, rather than the sum assured. s GWOL is a long term life cover product and not a savings plan, the cash in value always remains below total premiums meaning no gain is made, and hence no tax is payable. Note that no cash in value is available for regular payment policies. Single premium policies may have a surrender value but this will always be less than the premium paid, so no gain could be made. trust is a legal way of giving your assets to others. ssets held under trust are normally outside the estate for IHT purposes and can be dealt with without having to wait for probate. bsolute or Bare Trusts The simplest type of trust, set up for named individuals and gives them the right to both the income and capital of the trust. It may be appropriate when the donor s intention is clear and they are sure they will not change their mind there is no ability to change the beneficiaries. Flexible (power of appointment) Trusts viva provides a Flexible Trust form within the application form. This offers more flexibility as no beneficiary has specific rights to capital from the trust. The settlor or the trustees have the discretion to decide who will benefit, the amount and the timing of any benefit, from a selection of beneficiaries. Those beneficiaries may change from time to time when grandchildren are born, for example. 9

10 How are the premiums treated for tax purposes? Payments towards a plan written in trust usually represent gifts by the donor to their beneficiaries. How a gift is treated for Inheritance Tax purposes is dependent on whether it is an exempt transfer, a potentially exempt transfer or a chargeable lifetime transfer. ) Exempt Transfers mounts up to 3,000 may be gifted per tax year to any person, and last year s allowance may also be gifted if the allowance was not used. Gifts of normal expenditure out of income (salary, pension, interest, dividends, rental income etc) may be treated as exempt, as long as the gifts are regular, do not reduce the donor s normal standard of living or cause him/her to need to spend capital to make up the shortfall. C) Chargeable Lifetime Transfer (CLT). gift into a new trust (other than a bare trust) will create a chargeable lifetime transfer. There will be an immediate IHT charge (at the lifetime rate of 20%) if the value of the gift, when added to other CLTs in the previous 7 years, exceeds the nil rate band (from 6th pril ,000 for individuals). Further tax will then be payable if the donor dies within 7 years of giving the gift. There may also be IHT charges on each 10 year anniversary of the trust, and when distributions are made to beneficiaries. B) and C) may be most relevant for single premium business. This is where regular GWOL premiums could sit making them exempt, even if the 3,000 annual exemption has been used. B) Potentially Exempt Transfer (PET) gift directly to another person, or into an absolute/bare trust, is a potentially exempt transfer. Providing the donor of the gift survives seven years from the date of making the gift, the value will not form part of their taxable estate on death. 10

11 Q How do I get a quote and apply for GWOL? Quotes are available on the dviser Portal pplication is by a paper form (PT05011) which is also available for download on the dviser Portal. What support do viva offer when applying for GWOL? To help GWOL sales go as smoothly as possible viva offers l protection promise free temporary life cover between us receiving the application and communicating our decision, for a maximum of three months. The amount payable is either the sum assured or 1 million whichever is the lower. The protection promise is intended to provide security and protection against the unexpected. s a result it does not cover death by suicide, or any pre-existing conditions at the time of application. If the application is declined the free temporary life cover will end. The protection promise may be withdrawn for new business at any time without notice. Q l specialist high value support team (for any cases of 500,001 or more) to help with queries is available on (Option 4). l helpline for tax and trust issues on What other products could I use for IHT planning? It s not only GWOL that is relevant to IHT planning. Other protection products may be relevant for certain circumstances. viva also offers other product categories, such as Investments that may also be suitable for your clients specific needs. Term ssurance s described in the section on trusts, PETs or CLTs have a 7 year time frame for them to pass successfully out of your client s estate. term or decreasing term policy could be used to cover this 7 year period. Then, should the worst happen, the client s family may not be hit with the extra burden of an unexpected tax bill. l Direct access to our Pre-sales Underwriting Helpdesk. This team is on hand to provide pre-sales underwriting advice on what-if scenarios - all you need to do is call

12 viva Life Services UK Limited. Registered in England No Rougier Street, York, YO90 1UU. uthorised and regulated by the Financial Conduct uthority. Firm Reference Number aviva.co.uk PT /2015 viva plc