Bargain Life Insurance when you take out a pension policy
At last, a real life insurance bargain - but as always there arestrings
If you take out a new pension policy after 6 th April 2006 and withinthe same premium pay for life insurance cover, then you can use your
pension contribution tax allowance to reduce the cost of your lifeinsurance. This means if you're a standard rate taxpayer, you'll
receive22% tax relief on your life insurance premiums and relief at 40% if
you're a higher rate taxpayer.
Combined pension policy and life insurance
The combined premium you pay for your pension and life insurance willautomatically be reduced by 22% by the pension provider. But if you're
ahigher rate taxpayer, you'll need to claim the balance to bring your
relief up to 40%, on your year-end self-assessment tax return.
But there are three strings attached:
The pension company must also provide your life insurance and be paidas one combined premium.
The current value of your pension fund plus the sum insured by yourlife insurance policy must not exceed £1.5 million.
Your combined annual premium for your pension and life insurance mustnot exceed £215,000.
In practice the savings on your life insurance will not be quite as bigas you might otherwise expect. Its because the underlying premium for
the life insurance cover will be a bit more expensive than astand-a-lone policy with the same company and, in all probability, the
insurance company providing your pension policy won't be the cheapeston
the life insurance market. Furthermore, you can't buy a combinedpension
and life insurance policy online - so you'll miss out on the Internet'sdiscounted life insurance prices.
Nevertheless, if you're a higher rate taxpayer, your tax savings arebound to guarantee that your life cover is a real bargain! If you're a
standard rate taxpayer you'd be wise to do a little homework. Beforeyou
buy, you should get an online quote for life insurance to compareagainst the price you'd pay if you bought it alongside your new
Other things to know about combined pension policy and life insurance
There are some other points you also need to know. Firstly we knowyou'll ask whether you can convert your existing life insurance policy
into a combined pension purchase. The answer is no! The tax relief isonly available if from the outset, you take a pension and life
insurancepolicy as one combined purchase.
Secondly, the life insurance cover can only apply to the owner of thepension policy - you can't add in anyone else on the life insurance
policy. Joint policies aren't available as a pension/life insurancepackage.
And whilst many people also add critical illness cover to their lifeinsurance, this is not possible when you have a pension/life insurance
package. Critical illness cover pays out a tax-free lump sum if you arediagnosed with a specified serious illness which is listed on your
policy. If you want critical illness cover, you'll have to buy a normalstand-a-lone policy.
Finally, if you're going to buy a pension life insurance package andreplace your existing life cover, a few words of warning. You'll
obviously be older now than when you first took out your existing lifeinsurance policy. This means that the premium rate on your new cover
will be higher. Furthermore, the premium for your new policy could beloaded if you've developed any medical conditions since taking out your
original life insurance. Remember, even if you've simply put on weight,your premium could be loaded. In extreme medical cases, the proposed
insurer might even totally refuse to provide life cover. To avoid thepossibility of being caught without life insurance cover or being
forcedto accept a more expensive premium, you should obtain written
confirmation from your pension company that they will insure you. Youthen need to compare their proposed cost, net of tax, with your
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