Money: The Fixers - When more costs less

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The Independent Culture
SIMON HAS been a client of mine for a number of years. He is not a regular, but intermittently comes to see me when he needs advice. I reckoned it was some time since we'd reviewed his situation, so I invited him in for a meeting.

Simon is in rather an unusual and fortunate situation. He is both a chartered surveyor and a property developer. As such he buys properties, improves them, and rents them out. The yields on properties currently are extremely good compared with other investments. Simon has no intention of selling the properties, which would incur quite a tax bill for him.

He looks on his property development as providing income - not only now, to pay for his children's education, but also for his pension.

Simon is an extremely shrewd businessman. This is recognised by his bank, which lent to him even during the early Nineties recession when they had a limited number of developers to whom they were prepared to lend.

However, Simon's requirements as far as our services are concerned are to do with the protection of his income. He has three children, and his wife doesn't work. His future and that of his family rely on his health being maintained, and also on his staying alive to continue to manage his existing properties and buy future ones.

Looking in some detail at what was required, we uncovered that Simon has existing policies covering him for a little over pounds 400,000, which cost him pounds 80 per month.

At the time I set up policies for him, his personal income from his property development company was small. It has now built up quite substantially. We looked at his life assurance some years ago, and it is now out of date.

Bearing in mind his particular circumstances, we worked out that to provide enough to repay his loans and also provide his family with a reasonable income, he would need to increase his life assurance by pounds 300,000. This may seem a substantial sum but at today's low yields, a pounds 100,000 lump sum delivers an income of pounds 4,000 per annum, allowing for increases in capital.

As may be imagined, Simon was not particularly pleased by this suggestion.

"What do I get out of it if I don't die?" he wanted to know.

The answer for term cover is: nothing. Some return could be provided but it would be more expensive.

However, help was on hand, as I explained. He was now able to do a pension term assurance since his company is a proper trading company. This meant that he would get tax relief on the contributions that he paid for life assurance, with the Inland Revenue paying 40 per cent of the life-assurance costs.

The way the figures worked out meant that the cost of providing pounds 700,000 worth of cover came to pounds 70 per month, cheaper than the cost of the current cover for a sum of pounds 400,000.

Thus we were able to increase his overall life assurance quite substantially while decreasing the amount he was paying for it. Needless to say, Simon was delighted at the idea of saving money. He thought it quite appropriate that the Inland Revenue should pay some of his life assurance when he pays quite a high tax bill to them.

You have to be careful with the figures involved, as the Inland Revenue will allow only 5 per cent of income to be paid into a life-assurance contract. However, the figures worked out and Simon was able to proceed on this basis.

Simon has an up-to-date will, but we arranged a trust for the life assurance, so that on his death some of it could pass to his children free of inheritance tax. The rest was for his wife.

I suggested to him that rather than spend the pounds 10 per month that I had saved him, we should look to build up his protection if he were to fall ill. This was going to cost him some pounds 40 per month either to provide him with an additional pounds 500 per month on the existing health insurance that he has, or provide him with a lump sum of pounds 150,000 on diagnosis of a critical illness. Either option would serve his purposes quite well and it was simply a question of preference as to which he would find most useful.

It is always worth looking at the protection contracts that you have, and reviewing them. In our opinion they should be reviewed every five years as a minimum. Life assurance rates have now reduced and are extremely competitive at the moment. Providing that someone is in good health, there is no reason why a new term assurance should not be put in place and the old one cancelled. The only word of warning is that you should not cancel the existing contract until you have new cover in place!

Amanda Davidson is a Partner at Holden Meehan, independent financial advisers. Tel: 0171-692 1700