A Guide to Protection for Financial Brokers

Transcription

1 A Guide to Developing Business Strategy for Financial Brokers & Guidance One - Unified Voice A Guide to Protection for Financial Brokers Page 011

2 A Guide to Developing Business Strategy for Financial Brokers & Guidance One - Unified Voice A Guide to Protection for Financial Brokers October Page Version 1.1

3 Contents About the Authors 01 A Guide to Protection for Financial Brokers 02 Section 1: Personal Protection 1.1 Need for Life Cover 03 Why should your customer consider putting Life Insurance in place? 03 How much cover should you recommend? 03 Monthly Income Benefit 05 Child Life Cover 05 Types of Life Cover Plans 05 Mortgage Protection 05 Pension Term Assurance Serious Illness Need for Serious Illness Cover 09 Partial Serious Illness Cover 10 Child Serious Illness Cover Need for Income Protection / Permanent Health Insurance 10 Reviewable or Guaranteed Plan 10 Personal Income Protection 11 Company Income Protection Permanent Health Insurance vs. Serious Illness Cover How much does protection cover cost? What are the tax implications of life insurance for my family? How should the life plan be structured? Plans held in trust 15

4 1.10 Underwriting Issues Impact of Non-disclosure on an application Claims information Civil Partners / Cohabitants Life Assurance Succession and Inheritance Tax Impact on Succession Act Rights following a Divorce/Separation/Dissolution of a Civil Partnership Maintenance Payments on Separation or Divorce Arranging Protection Cover for Cohabiting Couples 27 Section 2: Business Protection 2.1 Types of Businesses, Business Insurance, Business Taxation Key Person Cover 32 Need for Key Person Cover 32 Who is a Key Person? 32 What can the proceeds of a key person plan be used for? 32 How much cover is needed for a key person? 32 Do I need to confirm at the outset what the cover is for? 33 Are premiums tax deductible? 33 Revenue clarification on tax treatment of key person insurance policies 34 Are the benefits taxable? 34 Where a customer is contributing to profit and is also the main signatory on a loan how do I structure that cover? 35 What documentation do I need to put a key person plan in place? 35 What if there is excess money from the policy? Underwriting considerations Key Person Insurance 36 What do underwriting need to know? 36 What financial evidence will be required? 36 When will third party financial evidence be required? 36 Are there any guidelines for appropriate levels of key person cover? 36 Do the requirements differ when applying for key person cover on an existing unsecured loan? 37 When would you consider a term beyond ten years or cover with a conversion option? 37 What if there have been recent losses in the business? 37 What if the key person cover involves a start-up company? Shareholder Protection 37 What is shareholder protection? 37 Need for shareholder protection? 37 How is shareholder protection set up? 38

5 2.5 Personal Shareholder Protection 39 How do I set up Personal Shareholder Protection? 39 Shareholders Legal Agreement 39 Structuring the Life Insurance Corporate Shareholder Protection 41 How do I set up Corporate Shareholder Protection? 41 The Legal Agreement 41 Structuring the Life Assurance 44 What are the taxation implications of Corporate Shareholder Protection? 44 What documentation do I need to set up Shareholder Protection? Partnership Insurance 49 Need for Partnership Insurance? 49 How do I set up Partnership Insurance? 49 What are the benefits of Partnership Insurance? 50 What documentation is needed to effect a Partnership Insurance arrangement? 51 What are the taxation implications of a Partnership Insurance arrangement? Underwriting Considerations Shareholders and Partners Protection 52 Section 3: Estate Planning Introduction Why is Estate Planning important for your clients? 54 How do I approach the issue of Capital Acquisitions Tax planning with clients? 54 Why should your customer make a will? 55 What is the target market for Capital Acquisitions Tax planning? 57 What is Inheritance Tax? 57 Who pays the tax? 57 Who is liable to this tax in Ireland? 57 What happens when the tax falls due? 57 Payment of Capital Acquisitions Tax 58 What value is used for the assets when calculating the liability? 58 What are the CAT rates and thresholds that apply? 58 What does Aggregation mean? 59 What assets are liable to Inheritance Tax? 59 What reliefs or exemptions can apply? 59 Spouse or Civil Partner Exemption 60 Agricultural Relief 60 Business Relief 60 Family Home Relief 60

6 Favourite Nephew/Niece Relief 60 How can Life Assurance Relief help? 65 Section 60 Relief now contained in Section 72 CAT Consolidation Act Tax payable on the inheritance of an ARF 66 Arranging the Section 72 plan 66 Benefits of Life Assurance Relief Underwriting Considerations - Inheritance Planning Protection 66 Appendices Appendix I I.I Sample Corporate Shareholder Legal Agreement 71 I.II Personal Shareholder Notes on Legal Agreement 73 I.III Sample Personal Shareholder Trust Form 75 Appendix II II.I Sample Corporate Shareholder Legal Agreement 77 Appendix III III.I Sample Partnership Insurance Legal Agreement 81 III.II Sample Partnership Insurance Trust Form 83

7 About the Authors Bernie Lynch is the Senior Protection Product Manager in Irish Life Brokerage. Bernie is a Qualified Financial Advisor and holds a first class honours degree in financial services and a diploma in management studies from the Dublin Business School. Bernie has extensive experience in protection sales and also previously worked alongside Caitriona Gaffney in Advisory Services in Irish Life prior to moving to a sales role in Caitriona Gaffney has worked in Irish Life s Advisory Services area for over ten years, providing guidance to Financial Brokers to assist them in taking advantage of the opportunities in the more complex areas of life assurance. Topics covered include business protection, structuring contracts to avail of relief from gift or inheritance tax, and other tax and legal issues relevant to the use of life assurance contracts. Caitriona also conducts informative and interactive presentations to assist Financial Brokers in creating opportunities in these more complex areas. A QFA since 2010, Caitriona also works closely with the LIA. Kate Connor joined Irish Life in January 2001 after completing a law degree in UCD. She worked as a Broker sales specialist for four years, before moving to a business development management role. She returned to Broker sales in 2013 as Protection Development Manager. She is a Fellow of the LIA and holds both the Qualified Financial Advisor and Registered Pensions Advisor designations. Page 1

8 A Guide to Protection for Financial Brokers This is an outline of the current tax and legal issues that may need to be considered when you are putting together a financial planning or protection arrangement for your clients; and it is based on an interpretation of current legislation and Revenue practice (October 2014). It is recommended that professional legal and tax advice is sought to ensure that any arrangement put in place is appropriate to each individual s circumstances. Whilst every care has been taken to ensure that the information in this Guide is accurate, Irish Life Assurance plc and PIBA do not accept responsibilitydoes not accept responsibility for errors contained in this document. This Guide does not constitute tax or estate planning advice and has not been prepared based on the financial needs or objectives of any particular person; and does not take account of the specific needs or circumstances of any person. Information is correct as at October 2014 but is subject to change. Page 2

9 Section 1 Personal Protection On completion of a fact find and full financial review with a customer, the normal course of action is to prioritise protection needs ahead of savings and pension needs. This is because you or your customers don t know when a death or a serious illness might strike. It could happen tomorrow; and for this reason your customer should consider putting protection in place immediately. 1.1 Need for Life Cover Nobody wants to think about the worst happening, but death is a fact of life, and it s a good idea for your customer to have a plan in place to protect loved ones financially in the event of death. Why should your customer consider putting Life Insurance in place? If your customer dies prematurely it could have serious implications for their family: it could mean a significant and sudden reduction in their financial wellbeing as: - Earned income will stop. - Loans may become repayable. - Inheritance tax could arise for dependants, depending on what and how much they inherit from your customer. While social welfare benefits payable on death, such as the widow s / widower s / surviving civil partner s pension, may replace part of the earned income, the benefits they provide are low and are designed to cover only the basic necessities of life. Putting life insurance in place can ensure that in the case of a premature death, the family will be on a firm financial footing. Your customer s income is their most valuable asset. It s important that they understand how their family s standard of living would be affected if they were no longer there to provide for them. How much cover should you recommend? Identifying the level of cover required for your customer will depend on your customer s individual needs. The level of cover required will depend on the level of income that needs to be replaced, along with any additional expenses that may be incurred. Page 3

10 There may not be any need for life insurance, or a need for a lower level of cover, if your customers don t have any dependents or their dependents are grown up and financially independent. The level of cover recommended should ensure that your customer s family s standard of living won t change in the event of a sudden death. It should provide enough cover to: Replace the gap in income Clear any loans or mortgage Ensure there is money to cover larger costs that may arise in the future: saving for third level education Compensate them should the surviving partner / spouse have to reduce working hours Cover the cost of any additional supports that may be required within the home, for example housekeeper / cleaner. When making any recommendation to your customer, you should take into account the widow s pension or any additional pension from an occupational pension scheme. Income Loss Deceased earned income Income Gain State Widow s / Widower s Pension Pension from occupational pension scheme of which the deceased was a member Savings in loan repayments, where they were covered by life cover Any potential savings in living expenses Once the gap in income has been identified, this must be converted to a level of life cover that can be used to provide the income in the event of death. Converting this gap in income to a life cover amount can be extremely complex, given we don t know when the event will occur and as a result how long the income will be needed. Two simple practical approaches are: 1. Multiply the annual loss by a fixed multiple, e.g. 15 or 20, attempting to replace the earned income for a fixed period of years. 2. Multiply the annual income by an age-related multiple, which reduces with age, as the level of cover required for your customer could potentially reduce as your customer gets older, e.g. children becoming financially independent, or a dependent spouse returning to the workforce.¹ Age Multiple of Income up 5 1 As per recommendations in LIA Diploma in Personal Page 4

11 Once the income gap has been converted to a life cover amount, this life cover amount can be reduced by any existing life cover in place, providing the actual need. The term of the plan being put in place will usually depend on affordability. Choosing a shorter term, for example ten years, will allow your customer to meet the full life cover need. The protection products available in the market will allow you to add a conversion option, giving your customers an option to continue the cover at the end of the term. Monthly Income Benefit Another alternative to putting a lump sum in place is to choose a monthly income benefit for your client. Your clients may find it challenging to decide what level of lump sum cover they should take out. However, most clients should be able to work out how much they take home and how much they spend each month. As a result, they can take out the amount of monthly income benefit cover that matches their needs. The income benefit guarantees to pay the monthly income until the end of the term. So for example, in a case with a 20-year term, if a claim is made in year 6, the benefit will be paid each month for the remaining 14 years. Similarly, on a 20-year term, if a claim is made in year 14, the benefit will be paid each month for the remaining 6 years. The income benefit will help your customer to manage their monthly income and, because of the structure of the benefit, will be cheaper than putting a lump sum in place. Child Life Cover Where a parent puts life cover in place, their children are usually covered for a specific level of life cover also. The level of cover, and the age limits that apply, will be outlined in the plan terms and conditions. These may vary from provider to provider. Types of Life Cover Plans There are different plans available to provide life cover for clients: Term plan Whole of Life plan Unit linked Protection Mortgage Protection plan this is a guaranteed plan that is put in place for a specific term. this can be a guaranteed plan that is put in place for the whole of the life of the insured. The premium will not change throughout the term of the plan. this is a reviewable plan that can potentially cover the client for the whole of the life of the insured. The premium may be reviewed throughout the term of the plan. this is a decreasing plan, where the life cover will reduce during the term of the plan in line with the repayment of a loan. Mortgage Protection A mortgage need will arise when a customer needs to borrow on a long term basis, usually to cover the purchase of property. The amount of cover required will depend on the size of the loan required. The type of cover required will depend on the type of loan arrangement. Page 5

12 Where the loan is on a capital and interest repayment basis, the customer should consider putting a decreasing mortgage protection plan in place. If the loan is on an interest only basis the lender will usually insist that level term insurance is put in place to cover the loan. Decreasing mortgage protection will be linked to an interest rate. The rate chosen should be enough to cover the interest rate payable on the loan. The plan will usually be assigned to the lender and in the event of the death of the life assured the proceeds will be paid to the lender to clear the outstanding balance. Once the loan has been cleared any balance will be returned to the surviving plan owner or the estate of the deceased. Most protection plans include a suicide clause: this means that in the event of a death due to suicide within the first twelve months, the claim will be declined. Where a protection plan is assigned to a lender, this suicide clause may not apply. You should check with the life assurance provider in terms of how this is applied. Because the complete plan will be assigned to the lender, if specified illness cover is on the mortgage protection plan any claim on the specified illness cover would also be payable to the lender. Pension Term Assurance Pension term assurance is life cover that pays your dependents a specified lump sum if you die during the term of the plan. The advantage of this type of cover is that it may cost less if your customer is eligible to claim tax relief on their contributions, up to certain limits. There are two different types of pension term assurance plan available. Depending on your customer s employment status they may be eligible to take out either personal pension term assurance or company pension term assurance. 1. Personal Pension Term Assurance Your customer will be eligible to take out pension term assurance if: - They are self-employed (paying tax under schedule D Case I or II), or - Your customer is in non-pensionable employment. This means that they are an employee who pays tax under the PAYE system, are not in a company pension plan and their employer will not contribute to this plan. Cover under a personal pension term plan can be provided up to a maximum age of 75. On death the lump sum provided for under the plan is paid to the customer s estate. The beneficiary will be liable to inheritance tax. There is no inheritance tax between legal spouses or registered civil partners. Tax relief on contributions There is no overall limit on the amount of life cover you can have. However the maximum contribution your customer can claim tax relief on depends on his or her age. If your customer is eligible to take out personal pension term assurance they may be able to claim relief up to the limits shown on the following page. Page 6

13 Age Up to 29 Years Multiple of Income 15% of NRE* 30 to 39 Years 20% of NRE 40 to 49 Years 25% of NRE 50 to 54 Years 30% of NRE 55 to 59 Years 35% of NRE Age 60 and over 40% of NRE * Net Relevant Earnings These percentages are capped at an earnings limit of 115,000 and include contributions to other approved pension arrangements. 2. Company Pension Term Assurance Your customer will be eligible to take out company pension term assurance if: - They are an employee paying income tax under Schedule E, and - Their employer will pay at least 1/10 th of the contribution to the pension term assurance plan. Although the company must pay the minimum set out above they can pay any amount up to the full contribution. Cover under a company pension term plan can be provided up to a maximum age of 70, and can end no later than your customer s chosen retirement age. Maximum Death in Service Benefits The maximum benefits that can be provided on death in service are: A death in service lump sum for dependents, plus A refund of any AVCs paid to the main company pension scheme or to a separate AVC scheme (does not include any employee contributions to a pension term assurance policy) A pension for the spouse or registered civil partner, and for dependents. Maximum Lump Sum The maximum lump sum allowable is four times final salary at the date of death. This limit includes any death benefits from company pension schemes relating to the same or previous employments. Death benefits from PRSAs or personal pensions are not included in this limit. As an alternative if the death in service lump sum is calculated as twice salary, death benefits from previous employments are not taken into account. The beneficiary will be liable to inheritance tax. There is no inheritance tax between legal spouses or registered civil partners. Page 7

14 Dependent s Pension The maximum pension that can be provided on death is the maximum pension that the employee would have been entitled to at their normal retirement age. Pension income is subject to income tax and Universal Social Charge in the hands of the recipient. A company pension term assurance can be used along with the value of any company pension scheme to provide these benefits should the customer die while in service. Tax relief on contributions The amount the employer pays is a tax-deductible business expense for them. The life assured s own personal contributions are tax deductible within the following limits: Age Up to 29 Years Multiple of Income 15% of NRE* 30 to 39 Years 20% of NRE 40 to 49 Years 25% of NRE 50 to 54 Years 30% of NRE 55 to 59 Years 35% of NRE Age 60 and over 40% of NRE * Net Relevant Earnings These percentages are capped at an earnings limit of 115,000 and include contributions to other approved pension arrangements. The life assured s personal contributions may be deducted from their salary by their employer before tax, and tax relief is therefore immediate. The maximum life cover that can be put in place is four times salary, plus allowances for a spouse s pension. The limit on life cover includes any life cover that the customer may have through their pension or AVC plan. 1.2 Serious Illness If an individual suffers a serious illness it could affect their ability to work, leading to a substantial drop in income. This drop in income could impact on their ability to continue meeting day to day expenses and overheads, such as mortgage and other loan repayments. There are two types of protection that can be used to protect customers in the event of a serious illness. These are: 1. Serious Illness Cover This pays out a lump sum in the event of the diagnosis of a serious illness covered by the policy. Page 8

15 2. Income Protection / Permanent Health Insurance This pays out an income in the event of the loss of earned income due to sickness or disability lasting longer than the deferred period covered by the policy. The maximum cover that can be put in place is either 75% or 66% of earned income, less the State benefit entitlement. These two plans provide two different types of cover. Some clients may have a need for a combination of these plans. 1.3 Need for Serious Illness Cover Serious illness cover is a living benefit that allows your customer to protect their income should they be unable to work as a result of a serious illness. The lump sum payable can be used to pay living expenses, mortgage, short-term debt and medical expenses, if necessary. For employees that pay PRSI, the social welfare illness benefit or invalidity pension may replace part of the lost income. However, the benefits are low and self-employed clients may not be covered for these benefits at all. Serious illness cover is often sold as an optional extra on a life insurance or mortgage protection plan, but can also be sold as a standalone plan. When added as an optional extra to a life plan, the customer has two options: 1. Independent Serious Illness Cover when structured in this way, the serious illness is independent of the life cover, so that in the event of a serious illness claim, the life cover does not reduce. 2. Accelerated Serious Illness Cover when structured in this way, the serious illness is paid as an accelerated payment of the life cover. For example, if a customer had 100,000 life cover in place and 50,000 serious illness cover, in the event of a claim on the serious illness cover, the life cover would be reduced by the amount of the serious illness claim, in this case leaving the customer with 50,000 life cover in place. When putting mortgage protection in place, there is also an option to add accelerated serious illness cover to the plan; this ensures that the mortgage will be cleared in the event of either a death or a serious illness. Trying to quantify the level of serious illness cover that a customer needs can be done in two steps: 1. Identifying the gap in income in the event of an illness. The gap in income needs to be converted to a lump sum amount that would be payable in the event of a serious illness. This is usually a multiple of the income to cover the lost income for a number of years. A minimum of two years income should be considered, but ideally this could be up to five years income. 2. Putting serious illness cover in place to cover any unsecured debt. Where a customer has a mortgage or any unsecured short term debt, serious illness cover should be considered to ensure that these are cleared in the event of a serious illness. The conditions covered under a serious illness benefit will be outlined in the plan terms and conditions. These will vary from provider to provider. In order for a claim to be paid, the diagnosis must meet the definition outlined in the terms and conditions. Page 9

16 Partial Serious Illness Cover Most plans also include a partial payment option in the event of a less serious condition. The amount of the claim will be confirmed in the plan terms and conditions, and may be an advance payment of the full amount. The list of partial conditions covered will be outlined in the plan terms and conditions. Child Serious Illness Cover Where a parent puts serious illness cover in place, their children will usually be covered for a similar list of serious illnesses. The full details confirming the age limits and level of cover will be outlined in the plan terms and conditions. These can vary from provider to provider. 1.4 Need for Income Protection / Permanent Health Insurance Income protection also provides protection for a customer in the event of a serious illness. This, however, actually replaces part of the monthly income that the customer will lose in the event of being unable to work due to sickness or disability lasting longer than the deferred period covered by the plan. There must be a loss of income in order for this type of benefit to become payable. There are a number of options available to customers when putting income protection in place. Reviewable or Guaranteed Plan A reviewable plan means that the premium is fixed only for a certain initial period. This means that the premium can be reviewed regularly by the provider after the plan has been put in place. The terms for implementing the review will be determined by the terms and conditions of the plan. A guaranteed plan means that the premium payable will be guaranteed not to change throughout the term of the plan. Ending age the customer may be able to choose the ending age of the plan, usually 55, 60 or 65. This may also be restricted by the customer s occupation. Deferred period the customer may be able to choose the deferred period of the plan, usually 13 weeks, 26 weeks or 52 weeks. The client must be unable to work for a minimum of the deferred period before the benefit will become payable. Again, the deferred period may be restricted by the client s occupation. Indexation while the plan is being paid for, prior to any claim, the client can choose to include indexation, which will increase the benefit annually without the need for medical evidence. The increase in premium and benefits will be determined by the provider and outlined in the plan terms and conditions. Escalation when the plan is being put in place, the customer can choose to include escalation on the plan. This means that in the event of a claim the benefit will increase annually. The annual increase will be determined by the provider and outlined in the plan terms and conditions. The maximum cover that a customer can put in place is up to either 75% or 66% of their income (depending on the terms of the plan). Providers may have additional limits depending on the level of income. Any entitlement for State Disability must be taken into account. Income protection may not be available to every client. The client s occupation and medical history will determine if they can get access to this benefit. The type of occupation will impact on the cost of the benefit. There are certain manual occupations that may not be offered income protection, or may only be offered cover at an increased cost. Page 10

17 Most income protection plans also offer a waiver of premium benefit: this means that should the client experience a claim on their plan, the premium for the plan will be covered as a part of the claim. The income protection benefit will cease if: - The insured returns to work - The insured is deemed by the life company to be fit to return to work even if the insured hasn t actually returned to work - The ending age selected on the plan has been reached - The insured dies - The insured retires. Income protection can be put in place on a personal or company basis. Personal Income Protection An individual can choose to put income protection in place on a personal basis. They pay the premium and can get tax relief at the marginal rate of income tax up to 10% of their earnings. In the event of a claim, the provider will become the individual s employer, deducting PAYE at source. Company Income Protection Employers can arrange to put income protection in place for their employees. The company covers the cost of the benefit for the individual, but can treat the payment of premium as an expense for tax purposes. In the event of a claim, the provider will pay the gross benefit to the employer for payment of income to the employee. 1.5 Permanent Health Insurance vs. Serious Illness Cover Whether you should recommend permanent health insurance or serious illness cover to a particular client will depend on the client s circumstances. Where possible a combination of the two types of cover will be appropriate. The final decision will depend on what the client can afford. Page 11

18 Here s a comparison of the two benefit types: Benefit Permanent Health Insurance Income payable. If unable to work for longer than the deferred period more than once during the term of the contract pay-out will recommence. Serious Illness Cover Lump Sum payable. As a once-off single payment only. Is benefit taxable? Yes, liable to income tax. No personal tax liability. When is benefit payable? Benefit starts being paid as a monthly income at the end of the deferred period, if the client is still unable to work due to illness or disability and as a result earned income has been lost. Benefit will continue as long as client continues to be unable to work. The benefit is payable on the diagnosis of a specific illness covered by the serious illness plan. Once-off payment is made once diagnosis meets the illness definition in the plan. What illnesses are covered? All illnesses and disabilities covered, unless specific exclusions apply, based on the client s inability to carry out their occupation. A specific list of illnesses applies to the plan. The illnesses and definitions of the illnesses will be outlined in the terms and conditions. Cover end age Cover will cease at the chosen ending age, usually 55, 60 or 65. Cover will cease at the end of the term of the plan. For term plans, cover can be put in place up to age 75 at present. For some whole of life plans, cover will be available on a whole of life basis. Specific illnesses may have earlier ending ages. Is tax relief available on premiums? Yes, for personal plans, up to 10% of income each year. No. Availability Only available if client is earning an income. Only available if occupation is covered. Wide availability, client doesn t need to be earning to put cover in place. No restrictions for occupation. Can be bought on standalone basis or with life cover. Your clients could consider replacing their income with permanent health insurance / income insurance and cover their unsecured debt with serious illness cover. However the type of cover recommended will depend on the client s circumstances and whether permanent health insurance / income insurance is available to them. Another option, where affordability is an issue, would be for the customer to cover part of their debt / loan repayments, so that at the very least there will be enough income insurance to cover these repayments. Determining the following will help to make the recommendation: - What is the client s occupation? Can they get access to PHI? If occupation is not covered, then PHI / income insurance can t be recommended. Page 12

19 - Is the client earning an income? Do they want to replace that income? If the client is not earning an income, they can t put income insurance in place. - Are they working in the home? If client is working in the home, then technically they are not earning an income and PHI/income insurance won t apply. - Does the client have large unsecured debt? Would they like to have this covered with a potential lump sum payment? - Does your client have any medical history? Will this history affect their ability to put PHI / income insurance in place? 1.6 How much does protection cover cost? The cost of protection will depend on a number of factors: - The age of the customer when the plan is put in place - The term of the plan - The level of benefits required - The smoker status of the client - Any additional benefits chosen - Current and past health if your customer has a medical condition or has a family history of certain illnesses or early death, they may pay a higher premium - Work and lifestyle the premium may be increased if the client s work or lifestyle interests are likely to put them at greater risk of dying early or suddenly. 1.7 What are the tax implications of life insurance for my family? Although life insurance benefits are paid out as a tax free lump sum, whoever inherits the money, depending on their relationship to the life assured, may have to pay inheritance tax. The amount of tax they pay depends on how much they inherit; their relationship to you; other gifts and inheritances they may already have received; and Revenue rules at the time of your death. There is no inheritance tax on sums received from spouses / civil partners: the life cover benefit will be paid tax free if the beneficiary is a wife / husband / civil partner. For couples outside spousal / civil partnership relationships, it may make sense to arrange cover so that one partner owns (and pays for) the cover on the other. This ensures that cover is paid to the intended party tax free. See the estate planning section for more detailed information on inheritance tax. 1.8 How should the life plan be structured? How a life plan is structured will depend on who is putting the plan in place and who is going to benefit from the plan. Joint Life First Death A joint life first death plan means that there are two people named on the plan, but there will only be one sum assured paid out. The death benefit will be paid when the first person dies, assuming the plan is still in force. The death benefit will be paid to the second person named on the plan as long as the plan is not being used as security for a loan or mortgage, or held in trust. Page 13

20 Dual Life plan A dual life plan means that two people are named on the plan. The provider will make two pay-outs, one when each person dies. When the first person dies, the proceeds will be paid to the second person covered on the plan, as long as the plan is not being used as security for a loan or mortgage, or held in trust. After the death benefit has been paid for the first person, the plan will continue as a single life plan for the life of the second person. Single Life plan There is only one person named on the plan. The death benefit will be paid to that person s estate if the plan is not used as security for a loan or mortgage, or held in trust. (The estate includes all the assets owned by the person who died, which includes any life assurance plans, property and investments.) The conditions of the deceased s will explain who should eventually receive the benefit. The provider will pay the death benefit to the executor (person responsible for managing the estate) named in the will or grant of probate. (A grant of probate gives the executor authority to deal with the assets of the person who has died.) The provider cannot pay the beneficiary (person who will receive the benefit) named in the will as the executor is the person who can legally claim under the plan. What if no will was made? For smaller sums assured, usually less than 60,000, the provider may ask the next of kin to fill in an indemnity form. By filling in an indemnity form, the person claiming legally agrees to indemnify the provider, in the event that somebody else has the legal right to claim the death benefit. You will need to check with the provider on the specific level of life cover that applies for a claim to be settled using an indemnity form. If the benefit is for more than the allowable level, the provider will need to see copies of the letters of administration. Life of Another plans A life of another policy allows a spouse, civil partner or another person to take out life assurance that will pay out in the event of another s death. The benefit will be paid directly to the policy owner without going to the deceased s estate. This is an alternative to writing the policy in trust. For cohabiting couples, arranging life cover on a single life life of another basis will avoid any potential liability to inheritance tax where the proposer (policy owner) actually pays the premium. It will also ensure that the proceeds are paid immediately to the policy owner. To take out a plan on a life of another basis, you must show that there is an insurable interest between the parties at the outset. Assigned plans If the plan is legally assigned or owned by a financial institution (for example to cover a mortgage or loan) or assigned to a third party, the death benefit will be paid to the financial institution or to the person the plan is assigned to. The financial institution or assignee will be asked to complete the claim form. Page 14

21 1.9 Plans held in trust If the plan is held in trust, the death benefit will be paid to the trustees. Writing a life assurance policy in trust means that the death benefit is omitted from the estate of the deceased. This is one way for an individual to retain full control of a life assurance policy while they live, but also to ensure that the policy proceeds go where the settlor wishes in the event of his/her death. A trust is set up through a trust deed and has three key parties involved: (1) Settlor This is the person who owns the policy and is creating the trust deed. (2) Trustee Usually there will be two or more trustees within a trust arrangement. The settlor will often act as one of the trustees. The trustees are responsible for the trust assets, the benefits of the life policy in this case. So in the event of the trust assets coming into the hands of the trustees, the trustees have a legal obligation to handle the assets in accordance with the trust deed. (3) Beneficiary This is the person / people who will ultimately receive (or benefit from) the assets of the trust. In the case of a life policy, the beneficiary will receive the sum assured under the policy. There are a number of benefits to writing a policy in trust. Immediate payment of plan proceeds on death: on the death of the life assured the proceeds are payable, on proof of death and satisfaction of all claims requirements, to the trustees for the benefit of the beneficiaries. There is therefore no delay in waiting for a grant of probate or letters of administration, assuming the trust form is correctly completed. Protection from creditors: the proceeds of a plan written under trust are protected from the individual s creditors, provided he / she did not set out to defraud the creditors by writing the life assurance plan under trust in the first place. Flexibility: it is possible, in some cases, to change the beneficiaries and their share of the plan proceeds from time to time, but any change must be in line with the terms of the trust. This should be checked with the product provider. In the case of business protection arrangements and inheritance tax planning it ensures the correct tax treatment of the plan proceeds. There are some disadvantages also: A plan issued under trust cannot be used as collateral security for a loan. A contract issued in trust cannot normally, be assigned. For the majority of standard industry trust forms, the potential class of people who may benefit under the plan is defined. While the settlor / trustee have the flexibility to change the people who may benefit from time to time he / she cannot go outside this class of beneficiary. It is very difficult to remove a plan from trust: if a customer wishes to do this they will need to contact their solicitor. How are the proceeds of the plan treated for tax purposes? Exit tax will still be deducted, if appropriate, from the proceeds of the life assurance plan before they are paid to the trustees. The trustees will then be responsible for ensuring that any CAT payable by the beneficiaries of the trust is paid. Where exit tax is payable as a result of a claim on the death of the life assured, the amount of exit tax may be offset against any inheritance tax liability arising for the beneficiary of the plan on the plan proceeds. Page 15

22 1.10 Underwriting Issues The underwriting process allows the provider to determine the risk of the application that has been submitted. Each application form will ask the client to complete a number of medical and personal questions to determine if there is any health history that could impact on the risk of the application. When a customer signs an application form to put a protection plan in place, they propose for a contract with the provider. Part of the application process is that they must share any material facts with the provider that may influence the terms on which the plan is accepted. It is the client s responsibility to ensure that any material facts are disclosed. Where a clean application is received, each provider will determine the medical evidence required to underwrite the plan based on: - the customer s age - the level of cover they are putting in place. In a lot of cases, the application will be all that is required. Setting an expectation with the client at the outset will ensure that there are no surprises for the client during the application process. All companies publish their underwriting limits and these should be reviewed with the customer when the application is being completed. Where there is a medical disclosure during the application process, the provider may seek further detailed information in relation to the condition. This could be in the form of: Additional information from the client Additional medical questionnaires Nurse screen examination Private medical attendant s report Independent medical examination. The additional information required will be determined by the specific disclosure. Where possible providers will try to accept applications based on information provided by the client. Currently, where there has been a medical disclosure, most life assurance providers can provide you with information that can be used at point of sale to give you an indication of: - The medical requirements: what additional information will be required? - The likely acceptance terms. Will a rating apply as a result of the medical history? Setting an expectation with a customer at the outset will lead to better conversion rates, from plan set up to issue. From the time an application is submitted until the actual start date of the plan, if there is a change in the client s medical situation they are obliged to update the provider. If this is not done, this could be classed as non-disclosure and any subsequent claim could be affected. Page 16

23 Special Terms Acceptance In some cases, as a result of the medical history of a client, the cost of their insurance plan may increase based on the increased risk. If the client has made a full disclosure, the provider should be able to give you an indication of the likely terms prior to full acceptance: this will allow you to set an expectation with the client. By setting an expectation at the outset of the likely acceptance terms, when special terms acceptance letters are issued to the customer they will be expecting an increased cost Impact of Non-disclosure on an application The non-disclosure of a material fact can have a real impact on the outcome of a claim. Providers are reliant on the disclosures made by customers when accepting the risk on a plan, so if information has been omitted, it could lead to the claim being declined. The Association of British Insurers (ABI) have issued a code of practice covering Non-disclosure and Treating Customers Fairly. It provides guidance on how different types of non-disclosure impact on the outcome of a claim. Three categories of non-disclosure and associated outcomes Category Explanation Outcome Innocent The customer has acted honestly and reasonably in all of the circumstances, including the customer s individual circumstances but only where these were known to the insurer. In the circumstances, a reasonable person would have considered that the information was not relevant to the insurer. The non-disclosure would have resulted in a different underwriting outcome. Pay the claim in full. Negligent Applies where the non-disclosure resulted from insufficient care the failure to exercise reasonable care. This includes anything from an understandable oversight or an inadvertent mistake to serious negligence. In the circumstances, a reasonable person would have known that the information given was incorrect and was relevant to the insurer. The non-disclosure would have resulted in a different underwriting outcome. Apply a proportionate remedy. Deliberate or without any care Only applies where the non-disclosure was deliberate or without any care. In the circumstances, on the balance of probabilities, the customer knew, or must have known, that the information given was both incorrect and relevant to the insurer, or the customer acted without any care as to whether it was either correct or relevant to the insurer. The non-disclosure would have resulted in a different underwriting outcome. Avoid the policy (decline the claim and cancel the policy from inception). Source: LIA Diploma in Personal Page 17

24 Life assurance companies in Ireland are not bound by these ABI guidelines. However as most reinsurance treaties are in place with reinsurance companies based in the UK, these guidelines will generally form the benchmark by which life insurance claims are assessed in Ireland. Non-disclosure Case Studies Non-disclosure Case Study 1 - Paul Flynn takes out a life insurance plan for 100,000. Clean application and accepted at standard rates. - It transpires at claim stage that he was diagnosed with diabetes four years before the policy commenced. - Question on the application form specifically asks about diabetes. Customer was clearly aware of the condition at the time of the application. - Disclosure would have had a material effect on the original acceptance terms. Cover would not have been offered at standard rates. - Death claim rejected and policy void. Non-disclosure Case Study 2 - John Byrne takes out a life insurance plan for 100,000 at non-smoker rates. - It transpires at claim stage that he was a lifelong smoker. Question on the application form clearly asks about smoking tobacco in the previous twelve months. - Customer is clearly aware of his smoking habits. Disclosure of smoking would have had a material effect on the premium offered. - Non-disclosure of smoking regardless of the cause of claim could result in the claim being rejected and policy void. Non-disclosure Case Study 3 - Mary Byrne applies for a specified illness plan for 100,000 and discloses that she had two skin lesions removed five years previously, and no problems since. - The life assurance company decides to accept the application based on the customer s disclosure. - There is a subsequent claim for cancer (malignant melanoma) where it is discovered that the biopsies of the original skin lesions had shown some suspicious changes. - However, the findings of the biopsies were not fully discussed with Mary Byrne. - The disclosure on the application was made in the utmost good faith and based on her level of knowledge. The onus is on the life assurance company to decide whether to obtain medical evidence or not. Non-disclosure Case Study 4 - David Walsh applies for mortgage protection cover for 100,000. He answers all the questions on the application form truthfully and is accepted at standard rates. - Death claim two years later due to accident while climbing in the Alps. - There was no disclosure made on the application in relation to his involvement in mountaineering, which would have had a material effect on the terms offered. - However, there was no specific question on the application form in relation to hazardous pursuits and pastimes, and therefore they cannot be taken into account at claim stage. Page 18

25 1.12 Claims information What is the provider likely to need in the event of a death claim? Legal (or non-medical) documents The provider will usually need the following: - A claim form completed by the person who can legally claim. - A copy of valid photographic identification (e.g. passport or driving licence) of the person claiming. - Address verification if the customer s address has changed in the last twelve months (e.g. utility bill or bank statement). - An original or certified copy of the final death certificate. The following documents may also be needed: A certified copy of the will of the person who died The claims assessor will need to see a certified copy of the will if: - The plan is only in the name of the person who died; - The plan is not assigned (for example to a bank as security for a loan) or held in trust; or - The amount that is payable is less than the allowable amount. Certified copy of the grant of probate or letters of administration The claims assessor will need to see a certified copy of the grant of probate or letters of administration if: - the plan is only in the name of the person who died; - the plan is not assigned (assigned means the ownership of the plan is given to another person or company, for example to a bank as security for a loan) or held in trust; or - the amount payable is more than the allowable amount. Original deed of assignment If the plan is assigned to a bank or financial organisation as security for a loan, the bank or financial organisation will have a deed of assignment. The original deed of assignment will be needed, but the provider will contact the bank or financial organisation directly to ask for this. Medical documents If required, the provider may need to ask for the following medical documents: - Medical reports from doctors or specialists When the death certificate is received that shows the cause of death, the provider will decide if it is necessary to write to doctors or specialists for details of the medical history of the person who died. When the medical report is received, this will be assessed by the provider, who may need to ask for some additional information from the same doctor or from another doctor or specialist. This may happen at different times while the claim is being assessed. - Postmortem or inquest report Sometimes, it may be necessary for the provider to ask the coroner for a copy of the postmortem or inquest report. Page 19