Single-premium Policies

Advantages

The majority of life insurance contracts are designed to provide protection or investment benefits over a period of 10 years or more in return for regular premium payments. But there is another class of policies - single-premium policies, where one lump sum only is paid at the outset. Before 1998 single-premium policies had considerable tax advantages, and so it made sense for investors to put their money into a life insurance policy, and get the investment gains tax-free, rather than use other methods.

Since 1998, however, most single-premium policies have been non-qualifying, which means that they are eligible neither for tax relief on the premium nor for freedom from tax in the hands of the policyholder, and so it is perhaps surprising that such policies have had great success in attracting money for investment from the public.

One reason for this is that since the mid 2000s the rate at which individuals have been net sellers of shares owned directly has increased, while more people have been putting money into shares through unit trusts. The latter attracted very large support in the 2000s when there was a steady increase in stock market prices. However, unit trusts are allowed to invest only in "quoted securities", which in practice means shares and, to a small extent, fixed-interest securities, although these are disadvantageous taxwise.

By the late 2000s it was realised that a pure equity investment via a unit trust was not what every investor wanted; many would prefer a more diversified investment embodying less risk.


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House Buying Example 17

Michael Strong is in a senior management position earning £125,000 a year, and he and his wife want to move from their current house (now worth £120,000) to a larger country home costing £140,000. They have a low-cost endowment mortgage for £500,000 on the existing house which they can transfer to the new house and have £500,000 of their own from the sale of the house (the other £500,000 having paid the existing mortgage) to put towards it. This leaves £120,000 to raise. The building society will advance a further £15,000 and this time Michael matches... see: House Buying Example 17


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