‘Whole Life Insurance Explained’ | Case Study: Phil & Jen

whole of life insurance explained

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Background:

‘Whole of Life Insurance Explained’ | Typical Case Study

Philip & Jennifer have been married for over 50 years. Phil is age 76, a retired GP on £58,000pa pension and his wife Jen age 72 is a retired midwife on £18,500pa pension. They have 3 children & 7 grandchildren between them, who are now all scattered around the country. 

Phil & Jen own their property jointly in Cheshire worth £1.8 million. They also have a holiday let property in Wales worth about £625,000 which all the family also use. Jointly they have around £350,000 in long term investments and £45,000 in savings.

They are thinking of maybe downsizing the Cheshire property and perhaps gifting their large family some money at that time to help them out. Their accountant has suggested this could be a good tax efficient idea, as they are financially in a position to do this and only just had a meeting about the matter.

Recently, both made Powers of Attorney for financial and health, with their 3 children acting as joint trustees. Both Phil & Jen will shortly update their wills again via their solicitor.

Existing Position Insurance:

Phil & Jen have a joint life 1’st death whole of life insurance policy. They took this out 40 years ago to cover each other and their then 3 young dependants. Initially for £250,000 lifecover for £55pm it was via an old Insurer that no longer offers any new plans. This old Whole Life Insurance cover is now instead administered by another Life Company that just deals with old closed Insurers plans.

It was an investment backed style policy, meaning their premiums were not guaranteed but reviewable. It was originally setup by that Insurer’s agent dealing at that time (and which they were not sure was fully explained back then or adequately for them since the agent retired). It is also not set in trust.

They have had numerous policy review letters over the years via this new Company. These annual letters are advising them that unless they wish to increase their monthly premiums, their whole of life assurance cover will then reduce. The Insurer explained in writing to them that this was due to assumption factors such as stock market drops, their increasing age & costs of providing life cover.

As such, they now have £118,600 joint life 1’st death whole life cover currently costing £192pm. This increased price was because they decided to increase their premiums a few times when prompted at their policy review letters and after speaking to the Insurers helpline.

Current Position Lifestyle:

The couple are young at heart and still lead a fairly active lifestyle. Neither have any serious health issues, although both are on medication for raised blood pressure.

Sadly, a few of their best friend’s have recently died. It seems these friends had nothing in place to help fully cover Inheritance Tax (IHT) costs on their estates. Phil & Jen raised their 3 children and 7 grandchildren to all be in a loving family unit.

This made them more aware therefore when their time comes of the importance of having a suitable life policy to help cover possible Inheritance Tax death duties. They want to ensure upon death their large family gets as much of their entire estate as possible, rather than a large percentage to the taxman.

Whole of life insurance explained | Part 1:

Jen firstly looks up to see what MSE Martin Lewis says about whole of life insurance and their various pro’s & cons.

Then afterwards looking for more professional advice for them both, makes an enquiry via our website about trying to help insure them both against potential Inheritance Tax IHT bills for their family.

We call her back & she then puts us on loud speaker so Phil can also listen as best as possible and explain who we are. We then have a good chat about their current situation, requirements & general needs with regards to IHT estate cover.

Having explained this, we move onto the differences between 2 main types underwritten whole of life insurance cover (excluding no medical over 50’s lifecover or over 60’s lifecover – as both not relevant).

Firstly, guaranteed none reviewable, which means the premiums & cover remain the same for lifetime. Secondly, investment backed reviewable similar to what they currently have (which they state they don’t like). Note: We don’t give advice on investment backed style plans. They would need to contact either the Company direct again or an investment qualified IFA.

Checking, we also confirm that upon 1st death, the other will currently get their £118,600 whole life insurance which would swell the estate. They are now less concerned about this as it could be always used for care fees or gifted away but will keep their plan going. Also, if they both died together check if Insurers offered any suitable life insurance trusts to keep those benefits outside their estate. Also, trusts should help them to avoid probate, or potential IHT.

Whole of life insurance explained | Part 2:

To help provide them a suitable Inheritance Tax policy, we state we would need a professional IHT estate valuation from their accountant. This valuation would ideally be in writing advising the potential inheritance tax amounts to be covered. This ensures we both have a written record as to any amounts recommended. They both listen to our advice & thought process and agree they will speak to their accountant over the next few days.

Several days later the clients have now spoken to their accountant. They e-mail us back re this and we call them again. Their accountant believes their current gross estate is worth around £3 million including cars, jewellery etc. This is before any current IHT personal & property tax allowances are taken off. The remainder the accountant states could be subject to 40% IHT tax on £2 million net or a possible £800,000 IHT tax bill upon 2’nd death.

Irrespective of wether they decide to gift their family some money in the future, their accountant recommends they may wish to now take out a suitable life insurance to help cover this potential £800,000 IHT bill. The accountant believes that the plan could be just set on a level basis and not inflation linked, as they may downsize properties in the future.

Advice:

After a fair & personal analysis, we then discuss the benefits of protecting their estate via a joint life but 2’nd death £800,000 whole of life insurance policy. This means the policy only pays out on the last death (unlike their existing plan that pays on the 1’st death).

The new policy must be set up into a suitable 2nd death trust from outset, otherwise their benefits would fall back into their estate again. In this situation, the £800,000 could be subject to Inheritance Tax IHT tax all over again. This would be both a very expensive costly mistake [40% = £320,000 ] and totally defeat the object of the exercise.

Unlike their existing whole life insurance policy, the premiums will be guaranteed and none-reviewable, which is what they want. The cover will also require a full medical for both plus GP reports. It may take a while to arrange this, which they understand. Unlike their current 30 year old policy, we advise this new whole life plan will be alot more expensive as they are 30 years older plus more lifecover.

Recommendations:

We then check the Insurers in the UK marketplace offering whole of life cover on a joint life 2’nd death basis. Given their above trust considerations, ideally with these Insurers offering their online wet signature trust options to help ensure ease of plan completion.

The fixed none-reviewable premium quotes are not cheap and are well over £2,000pm for £800,000. We email these options, a copy of the Insurers Key Product Features plus quotes, definitions & legal disclosures.

Calling up Phil & Jen a few days later to discuss this, we re-explain our findings. They are surprised that the premiums were so expensive compared to what they now pay.

As such, they advise after numerous discussions with both their family and accountant they decide to just go ahead with insuring 50% of their potential IHT bill. The cost for £400,000 joint life 2’nd death cover they feel is a more affordable £1,000pm.

We also request in due course they provide us with details of their requested trustees and beneficiaries. This will enable us once terms are agreed to place the policy into Insurers trust from outset.

Whole of Life Insurance Case Study – Conclusion:

Their accountant then sends us a letter of authority as requested for their Inheritance Tax IHT estate valuation cover. It also mentions their clients decision to only currently insure 50% of the potential IHT situation.

We diarise to follow up on all medical health tests for things like checking their blood pressure & cholesterol. We will send a fully documented report that explains their various demands & needs.

When they downsize the Cheshire property, they will now consider gifting a £400,000 lump sums to help their large family. It will also reduce their overall estate value. That gift we state could be subject to a sliding 7 year IHT tax & would require another accountant letter of authority at that stage. Phil & Jen will then consider insuring this lump sum gift separately via another specialist life plan called ‘gift inter vivos’. This would still be subject to tax rules and health permitting at that stage.

Both agree it’s OK for us to make a diary note to recontact them in the future re this matter.  

“Whole of life insurance explained” Example Case Study | Article by Martyn Spencer Financial Adviser (2024)

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