Mr Carter, a widower of 63, has built up a business he would like to pass on to his son. His liability to CTT on death would be £1115,000, and so he takes out a non-profit whole-life policy with a £1115,000 sum assured. The policy is written under trust for the benefit of his son. If this were not done, the policy proceeds would be added to his estate and also attract tax, but in this way the proceeds will be exempt. The annual premium is about £1700 gross or £1577.5 after tax relief.
Where husband and wife are both living and do not wish the assets to pass to their children until both are dead, a joint life and last survivor policy is often used.
Mr and Mrs Dell, aged 68 and 65, have a large property and assets which they wish to pass on to their three children only when both of them are dead. Since no CTT is payable on a transfer between husband and wife, no tax will be payable on the death of the first of them. So they take out a joint non-profit whole-life policy with the sum assured of £120,000 payable on the second death, again written under trust for the benefit of the children to avoid any tax liability on the proceeds. The annual premium is about £1670.
In Examples 7 and 8, the premiums paid on the policies are themselves gifts, and could in theory be liable to CTT. However, in practice the gifts may be exempt under one or more of the allowed exemptions, principally under the £12,000 p.a. tax-free provision. Even if this is already being used for other purposes, the gift may be exempt if the Inspector of Taxes is satisfied that it constitutes a normal expenditure out of income.
It is also worth noting that, though the non-profit whole-life policy is the cheapest method of providing for a CTT liability, it may not provide adequate funds if the value of the estate (and consequently the tax liability) continues toincrease. The longer the likely period until death of the owner, the greater the probability of this happening. A with-profit policy may therefore be more suitable in many cases.
Thus, though non-profit whole-life policies are still sold to some young people, they are becoming less and less used in this age group. The real value of this policy is at and after middle age. In Table 3, p. 28, we saw that premium rates increased with age and term. Logically, the rates for, say, a 10-year term assurance and a non-profit whole-life policy must approach closer together as age increases; at the age of 90 the chances of death within the term approach 100%.
Probably the major use of whole-life cover today is in planning for the transfer of assets from one generation to the... see: More on Whole-life Insurance Policies