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Buy a solution – not a problem

Over the last three years, during the longest bear market since the 1930s, many of you have focused more on protection.

This has been a means of generating income in a market that has sometimes been difficult for investment business. In many segments of the market, volumes have been heavily influenced by price but there are other important differentiators which enable you to add even more value to your clients.

Let us consider one part of this market – the market for whole-of-life cover. This divides broadly into three products – unit-linked qualifying policies, unit-linked non-qualifying policies (onshore or offshore) and traditional non-linked policies.

There are two key issues in this market. The first is investment returns. When looking at growth rates assumed to support unit-linked products, offshore companies can assume “gross” growth rates as they suffer no life company taxation.

In recent years, likely future investment returns have required offshore providers to dramatically reduce their growth rate assumptions.

This has narrowed the gap between them and their onshore competitors. However, the issue is that if the assumed returns are not achieved, the policy will require an increased contribution to sustain the cover.

The solution is guarantees. You have been asking for this product design for years. However, there are still very few products available which offer a guaranteed sum assured payable on death in return for a level premium which is also guaranteed throughout the client&#39s life.

Guaranteed premiums, with no premium increase ever imposed on the client, are particularly attractive to the older client.

The second key issue to focus on is that unit-linked non-qualifying contracts will have a potential income tax liability in the future.

The contract will come to an end on the death of the last of the lives insured to die. Where the policy is qualifying, no tax liability arises.

On a non-qualifying policy, death giving rise to benefits is a chargeable event. The sum assured itself may not be liable to income or capital gains tax but an income tax liability will arise if the surrender value at date of death exceeds the premiums paid.

The difference between them is liable to income tax. Where the policy is onshore, only a higher-rate liability arises but where the policy is offshore, the tax will be levied at the client&#39s marginal rate.

An example may help to illustrate the point. Let us consider a case of a couple each aged 60 next who have a joint life last survivor policy where the premium is £500 a month and the sum assured is, say, £400,000.

Let us assume that the surrender value at year 20 is £190,000. If both clients were to die, the sum assured of £400,000 would be payable. However, if the policy was a non-qualifying policy, there could be income tax to pay. The gain would be equal to the difference between premiums paid (£6,000 pa x 20 years = £120,000) and the surrender value immediately before death (£190,000). That is, £190,000 minus £120,000 equals £70,000.

If the surviving client was a higher-rate taxpayer and the contract was with an onshore insurer, then the deceased&#39s estate would have an income tax liability of 18 per cent of £70,000 which is £12,600.

If the contract was with an offshore insurer, the estate&#39s liability would be 40 per cent of £70,000, which is £28,000. Therefore, unit-linked non-qualifying whole-of-life policies rarely give your clients the benefits they expect.

Price can be important but remember that the price given at outset may never provide the sum of money required in the event of death.

If the assumed returns are achieved, the client may suffer a tax liability on death. If the assumed returns are not achieved, then premiums will have to rise to sustain the cover on the standard basis.

Either way, your client pays more than is immediately obvious from the initial quote. In conclusion, it seems that the most effective solution is to choose whole-of-life cover very carefully.

Look for one which guarantees to return the selected sum assured in return for a level premium that is guaranteed throughout your client&#39s life and never incurs any income tax liability.

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