Investment Options with Life Insurance

Endowment Insurance

Endowment insurance policies are investment type life insurance policies - they allow you to invest your premiums into a number of commercial interests as well as a life insurance plan. Although dearer than protection insurance alone it will help your family's finances should you die, while at the same time it is a method of long-term saving. Endowment policies are sold either with-profits or on a unit-linked basis.

With either type of policy, you pay premiums for an agreed term at the end of which you receive a lump sum, which is either the sum insured together with some form of bonus or some form of investment growth depending on the type of policy you took out. The important thing to understand with endowment insurance policies is that there is no set guarantee on the size of the return.

Bonds

Bonds are investments purchased with a single premium lump sum, although in some cases, regular payments toward an eventual bond purchase can sometimes be arranged.

As with an endowment policy, your payments are invested by your insurer into a single bond either on a with-profits or as a unit-linked investment basis where you can choose the bond your premium is linked to.

It is possible to invest premiums into a guaranteed income bond; these pay you an income at a guaranteed rate for the duration of the bond, with your remaining capital returned on the maturity date. The return you receive with a unit-linked single premium depends on the movement in the unit prices over the period of the policy. Insurance companies offer a range of different funds to which your policy can be linked.

With-profits

A with-profits fund is a group investment, where the money you pay into the premium is pooled with other people's premiums and invested by the insurance company into a wide range of assets; with-profits plans sees your premiums invested into stocks and shares, bonds, government bonds, property and cash. A fund manager will be appointed by the insurer to oversee the investment and the return your policy pays is smoothed so that you are protected from the more extreme risks of direct investment.

The investment growth achieved by the with-profits fund is paid to you as regular and final bonuses and added to your policy. The main benefit of a with-profits scheme is that once these bonuses have been awarded, your estate is almost guaranteed to receive them at the end of the term.

It must be noted that there is an element of risk with such a policy. Growth and bonuses cannot be guaranteed in advance but it is likely that bonuses will add significantly to your sum insured, bringing you a good investment return over the years of your policy.

Guaranteed sum insured, most appropriate for something like a mortgage.

Unit-Linked Policies

With a unit-linked policy, the insurer invests your premiums in specific funds chosen by you. The amount payable under your policy depends on the value of the investments in those funds at the time of maturity.

Because of the high risk associated with such an investment, there is no guarantee of the value of the sum to be paid on maturity; there is no guaranteed sum insured payable except in the case of death. The plus is that the potential profit from a unit-linked endowment policy can be much greater than that from a with-profits policy. By the same coin, there is also the risk that the eventual profit could be lower, as the value of your investments can fall as well as rise.

No guarantee for the value of the sum insured, but you get to say where your money is invested.

Inheritance Tax Planning & Life Insurance

On your death your estate might be liable to pay inheritance tax. This tax is payable if the value of your estate is over a certain threshold. The threshold is subject to change each year, with new thresholds announced by the Chancellor in the budget - the inheritance tax limit for the 2007/8 tax year was £300,000.

Currently, the rate of tax is set at 0% on the first £300,000 - this is referred to as the "nil rate band" - any amount of money above this band is liable to be taxed at a rate of 40%

Life insurance plans can be arranged in such a way that on your death, the sum insured does not become part of your estate and therefore not then be liable to IHT. The policy insured sum can then be used to contribute towards any IHT for which the estate is liable to pay. Gifts given in the last seven years of your life can also create a liability to pay Inheritance Tax. Life insurance can be arranged to cover this liability - this understandably drives the cost of premiums up, but ensures that an estate will not have to pay any IHT.

Payouts from life insurance policies are often liable to pay income tax - it is possible to apply for life insurance where payouts are not subject to this. A policyholder will need to pay premiums in instalments of a greater frequency than is normal for life insurance if they want the sum insured to be income tax exempt - the number of policies which qualify for this are rare, often restricted to whole life or investment type policies.

Related Frequent Questions:

• Life Insurance Explained
• Optional Life Insurance Extras