View more on these topics

Martin Werth: Hidden opportunities

Underwritten whole of life has a vital role to play in financial planning.

Martin-Werth-MM-Peach-330.jpg

Underwritten whole of life plans provide attractive returns for people wanting to leave funds to beneficiaries, invariably exceeding those available from pensioner bonds and gilts. The only requirement is not to lapse the plan. These products should be considered in a balanced portfolio, particularly for clients looking to mitigate inheritance tax.

I first came across the hidden opportunities of whole of life in the 1990s. Canada and Ireland were seeing rapid sales growth from a product called Term 100 and when I did the maths it was clear that, for customers who did not surrender, the effective returns (for beneficiaries) were phenomenal. Advisers quickly wised up and soon insurers realised the actual lapse rates were far less than assumed and the products were re-priced or withdrawn.

Whole of life insurance is already attractive because it is excluded from means testing and, when written in trust, is not subject to IHT. It can be a good solution to cover a beneficiary’s IHT liabilities.

Advisers may incorrectly assume underwritten whole of life only makes sense for policyholder’s who die within a relatively short period from purchase. This is not the case. The returns on premiums can be significant, even for those living many years past their life expectancy.

For example, in analysing the effective net returns for a 65-year-old non-smoker, the following points can be highlighted:

  • It takes 42 years for the premiums paid to exceed the sum assured. Even with dramatic improvements in life expectancy, very few 65-year-old non-smokers would be alive aged 107.
  • It takes 27 years before the premiums rolled-up at 3 per cent per annum exceed the sum assured.
  • Where the policyholder dies after 20 years the net returns would be 6.9 per cent per annum.
  • Where the policyholder dies after 30 years the net returns would be 2.1 percent per annum.

In summary, the overall returns on this low risk product are attractive and even with an extended life expectancy are not unacceptable.

The returns would be significantly more favourable where premiums are paid from funds subject to IHT. For comparison purposes the premiums should be reduced by the expected marginal IHT rate on the funds they were drawn from.  This would increase the returns on death after 20 and 30 years to 11.3 per cent and 5.1 per cent per annum net.

Clearly the prerequisites to make this work are writing the policy in trust and not lapsing the plan. The latter is critical. However, in comparison with pension annuities, for which Steve Webb has argued for a secondhand market, for life assurance there is already a small viaticals market.

Some insurers looking to enter the market have mentioned they may include a long-term care drawdown facility. I am in two minds about the value this adds. While it ensures the policyholder has access to funds, it would be more tax efficient to first draw from funds potentially subject to IHT. In addition, the long-term care benefit would increase premiums and, for those who do not claim, it would diminish the attractive returns.

Martin Werth is chief executive officer at UnderwriteMe 

Recommended

FCA logo glass 620x430
2

FCA publishes first data on compliance guarantees

The FCA requested 10 compliance guarantees of small and medium-sized firms last year, new data reveals. The regulator has today published quarterly statistics on its use of attestations for the first time. An attestation is a written confirmation that a firm is meeting certain regulatory requirements. They can take the form of a Dear CEO […]

HSBC-Branch-Building-700x450.jpg
10

HSBC ‘helped wealthy clients dodge millions in tax’

Thousands of wealthy clients were helped to avoid tax by HSBC’s private Swiss bank, leaked documents reveal. Accounts of over 100,000 international clients leaked by a whisteblower in 2007 uncovered up to 1,100 UK residents who had not paid their taxes, according to the BBC’s Panorama programme. The documents also show how HSBC bankers helped […]

Steve-Webb-thoughtful-response-in-2014-700.png
1

DWP reveals details of pension auto-transfer plans

The Department for Work and Pensions has published more details on its plans to tackle an estimated 50 million small pension pots, including which schemes are in scope and how the programme will be rolled out. In a paper published today, the Government confirms money purchase pots of less than £10,000 will automatically follow a […]

6

Wheatley: ‘Second line of defence’ rules won’t be published until March

Pensions providers will have to wait until March to receive final rules on the information they must give to customers looking to access their funds under new freedoms. The FCA wrote to providers in late January confirming it would introduce a so-called ‘second line of defence’ ahead of new pension freedoms coming into force in April. […]

Help, I’ve been appointed as a trustee. What are my responsibilities?

Graeme Robb, Technical Manager at Prudential looks at the key duties and responsibilities of a trustee.  This article will consider the following: Duties to be performed on appointment Investment duties Protecting the interests of beneficiaries Keeping accounts and records Distributing property to beneficiaries Duties to be performed on appointment Obtain a copy of the trust […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com