Tax Efficient insurance is another name for pension term insurance. Tax efficient insurance, just as the name implies, is insurance that can save the insured a substantial amount of money due to the tax benefits. Generally, tax efficient insurance works by allowing the customer to buy their term life coverage with pension funds. While this has been allowed in the past, a re-write of pension laws in April 2006 has cause the policy to become more widespread. Prior to the change in the pension laws, only 10 percent of an individuals pension could be used to buy pension term insurance. The law lifted that cap, which allows up to 100 percent of income to be invested into pensions, including pension term insurance.
This change in the law can offer a tremendous tax relief to the consumer. Depending on the rate of tax that you pay, you can expect to save anywhere from 15 to 40 percent. While you can expect to pay more for pension term insurance than traditional term insurance, the tax benefits actually make the pension term insurance a greater savings. You will receive the same tax relief from your tax efficient insurance as you do from your pension as long as the combined pension and life insurance policy do not exceed 100 percent of your income.
What are the Drawbacks of Tax Efficient Insurance?
Tax efficient insurance is not the best choice for everyone. If you are interested in supplemental coverage, such as critical illness or income protection insurance you should stay with a traditional term life insurance plan. Tax efficient life insurance only allows basic coverage.
Perhaps the biggest potential drawback of the tax efficient insurance is the income cap at death. While a traditional pension fund and life insurance policy will not be taxed at death, you may receive a surprise with the tax efficient insurance. When the insured dies, if their pension fund combined with the payment from their insurance policy exceeds 1.5 million pounds, they will be taxed at 55 percent for the amount over this cap. The reason for this is that the tax efficient insurance payout counts as part of the lifetime contribution towards a tax free pension. 1.5 million pounds is the current limit for this.
If you are trying to determine if a tax efficient term insurance policy is right for your family you can read more about the various options at Internet sites such as http://thisismoney.co.uk and http://www.fool.uk. Both of these sites offer extensive information about the various types of term insurance policies available.
Is Tax Efficient Insurance Right For Me?
The ability to buy term life coverage with pre-tax money is a great way to save a substantial amount of money. However, tax efficient insurance is not right for everyone. Tax efficient insurance policies are normally written only for an individual, so a policy covering both you and your spouse will probably not be available. If you plan on having a large pension at retirement, you should think carefully of the tax implications for your family at your death. The substantial 55 percent tax that they will be required to pay can be a painful hit financially. Also, if you have reason to need family income replacement, critical illness, or other specialized coverages added to your term coverages, then tax efficient insurance may not be the best choice for you or your family.