Most people would not consider life insurance as an "investment." In the true sense it is not, at least for the life assured. However, the returns for the beneficiaries can be quite extraordinary
Let us consider a couple of scenarios. Firstly, Mr and Mrs Jones are 67 and 65 respectively. It has been calculated that they have an Inheritance Tax liability of £500,000 but are not able to give away assets. However, they want to ensure that their children receive the full value of their estate and life’s work and so have decided to insure against the potential tax liability, so their children have the funds available to pay the tax as and when it arises.
Both are healthy for their ages and are quoted £915 per month. The policy pays out when the second of two die and the money is paid into a trust for the benefit of the children. The policy is affordable for the Jones, but the children decide to contribute too. Afterall, it is for their benefit. Mr Jones dies at the age of 83 but Mrs Jones makes 85. The policy pays out the £500,000. The cost over the 20 years has been £219,600 so the family has more than doubled its money. The money is tax free. It equates to an annual return of 6.6% net.
Remember that the policy can pay-out at any time. So, if for some reason the couple only survived ten years, the £500,000 pay-out would equate to a staggering return of almost 29% per annum on the premiums. In addition to the financial value, there is also the peace of mind that the family is well catered for, and the children will have the money for the tax bill. That is difficult to value.
A second scenario is a business which is profitable, netting £400,000 per annum for the two shareholding directors. However, one of them dies and they have no structure or finance in place to buy out the deceased individual’s spouse. The spouse wants to be involved in the business, but the two cannot work together. The business goes into decline and is wound up. However, if the two directors had put in place shareholder agreements and insured each other so that the survivor had funds available to buy out the spouse, it might have cost them a few hundred pounds a month. But it would have saved the business and the surviving director would still be reaping the rewards. In addition, the deceased’s spouse would have received fair value for the shares tax free. Instead, they both must start again after considerable cost and disruption to their lives and finances.
So, life insurance can be a very good investment as well as providing the benefit of peace of mind and the satisfaction of knowing matters are taken care of.
