The likes of income protection and critical illness policies are designed to cover ill-health rather than providing cover on death. Nonetheless, both can have a role to play in intergenerational planning, and in conversations with clients to this end.
As Canada Life's Neil Jones outlines: “Income protection is designed to cover an income that could be lost due to being unable to work, and CI provides a lump sum if the life assured suffers one or more of certain medical conditions.
“In both instances as the policyholder is alive then they will generally need the money that the policy produces.”
Moreover, in both instances the cover being provided helps the policyholder retain the wealth they have accumulated in order to maximise the wealth that is then passed on to the next generations or other beneficiaries.
For example, if someone was unable to work and did not have any income protection cover then they would have to meet regular expenditure through the use of savings, reducing the amount of money available to pass on to their beneficiaries.
If they were to fall ill then CI cover would provide a lump sum for use and again reduce the impact on any savings, helping to maximise the size of the estate.
However, the impact of not having such insurance could produce problems.
“In some circumstances, without cover a person may consider equity release or, if they are old enough, using a pension and this could have a long-term impact,” Jones says.
Tony Mudd of St James's Place sees the presence of life assurance as a way of compensating the other children or “in other words, balancing out the value distribution upon death”.
He stated that life assurance policies can be used to provide “appropriate compensation” in the case where an individual’s death is “represented by illiquid assets”.
“For example, multiple children from a marriage are going to inherit, but the principal asset is a property that is lived in by one of the children or shares in a business run by some of the children but not others.”
Jones adds that a whole-of-life policy should be used in cases where the beneficiaries would end up funding the life assurance policy on death.
“In this scenario, as nobody knows when they are going to die, then a whole-of-life policy should be used rather than a term assurance. The former provides cover until someone dies, whereas the latter only provides cover for a set number of years.
“Whatever life assurance is used, it is important that the policy is held in a suitable trust and that the money used to fund the policies fits within one of the exemptions to avoid any confusion or additional inheritance tax issues.”
He notes that, crucially, the level of cover required for the scenario that an individual dies will change, and therefore should be reviewed regularly to ensure it remains suitable.
“Generally, the cost of the cover will be a lot less that the actual IHT that could be payable, so it can be a very cost-effective and simple method of estate planning with no need to gift capital,” he added.
