Life Insurance. Let your pension save you money on Life Insurance

Sounds too good to be true? Well it’s a good deal but there’s always a catch.The new rules say that any pension taken out after 6th April 2006 that can be combined with life insurance into a single premium, will be able to offset the pension contribution tax allowance against the cost of the life insurance. So if you pay tax at the standard rate, that’s a 22 saving, and if you pay at a higher rate, you’ll save 40.The reduction will happen automatically, courtesy of the company with whom you hold your pension and life insurance policy. That’s if you’re a 22 taxpayer. If you pay at the higher rate then you’ll need to fill out a year-end self-assessment tax return to get the full 40 tax relief.There are three stipulations:•You must have both your pension and life insurance with the same company and pay as one combined premium.•The combined value of your pension fund plus the amount that your life insurance covers you for cannot be more than £1.5 million.•You must pay no more than £215,000 a year in combined premiums.The life insurance savings aren’t quite as good as they sound – primarily because the very fact that you are buying life insurance from your pension provider will probably mean that you’re not getting the cheapest deal on the market. Also, it is likely that you will pay slightly more on life insurance because it is combined with the pension, compared to a standalone policy. The cheapest deals are on the Internet, and seeing as you can’t buy a combined policy in this way, you will probably be paying more than the lowest prices available. The people that will really benefit will be the higher rate taxpayers. The tax savings of 40 will make a big difference. Those that pay at standard rate should probably do their sums first before getting too excited, because the 22 savings may be cancelled out by the more expensive policies. Check out the online competition and get a standalone quote on life insurance to see how much you would pay for that and your pension, compared to the combined cost. Here are a few other pointers that will make a difference:1. You won’t be able to convert your existing life insurance policy into a combined policy with a pension. You can only benefit from the tax relief if it’s a new pension and life insurance scheme, bought together at the outset as a combined purchase. 2. You can’t get a joint life insurance policy with the combined policy. It will be your name on the life insurance and your name on the pension – that’s the only option. 3. Critical illness cover won’t be available as an addition to the life insurance. It’s a good form of insurance because it pays out if you fall ill with a serious illness that is listed on your policy. But if you want this type of insurance, you’ll have to arrange it separately. We advise that you look into the matter carefully before making a decision. If you already have life insurance, the premiums will now be higher than they were because you are older than you were when you first arranged the policy. Age makes a big difference to premiums. Also, if you have developed a medical condition since taking out your first policy, you’ll pay more on your new policy, similarly if you are overweight, they will raise your premiums. If you have a serious condition or are extremely overweight, they could refuse to insure you. The advice is: don’t cancel your existing cover until you have your new life insurance cover confirmed in writing. Too many people cancel their existing policy, then either get rejected or find the new premiums are too expensive, and then it’s too late to go back on their decision. Once the decision is confirmed, check you will still be making a saving, otherwise you’re best off sticking with your existing arrangements.

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