Cut the cost of your life cover in the taxman's summer sale

Make serious savings with pension term assurance, but only if the policy is right for you, says James Daley
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The Independent Online

Who wouldn't want to cut the cost of their life insurance by up to 40 per cent? If you're a taxpayer, new rules introduced by the Government in April enable you to do just that. As part of an overhaul of pensions regulations designed to make saving for old age simpler, ministers dropped most of the restrictions that previously applied to people who bought life insurance with a pension.

As a result, most large life insurance companies have since launched pension term assurance (PTA) policies - basic cover on which you get tax relief at your highest marginal rate of tax. Basic-rate taxpayers' premiums are reduced by 22 per cent - the value of the tax relief - and higher-rate taxpayers can claim a further 18 per cent back.

The savings can be considerable and you don't need an existing pension to buy the cover - the policy comes automatically set up as a pension benefit in order to qualify for the tax relief.

According to price comparison service, a 35-year-old male non-smoker would pay £120 a year for £100,000 of basic-term assurance from insurer Bright Grey. However, a PTA policy from the same provider offering the same level of cover would cost just £91.68 for a basic-rate taxpayer. For older people, or those who pay more for insurance due to health problems, the savings in cash terms could be even more substantial.

Given the savings on offer, should everyone in need of life insurance assume that PTA is the best option? Kevin Carr, of independent adviser LifeSearch, says not: "It's a great option for many people but you've got to exercise a degree of caution." Carr points out that there are drawbacks to PTA. Above all, the cover you get will be of the most basic kind. For example, many people who buy conventional-term assurance also pay a small additional premium that allows them to keep their policy but stop paying premiums in the event that they are unable to work. This is known as "waiver of premium" cover, but is rarely available with PTA. Legal & General is the exception - offering it as a free add-on with its PTA policies - but as a result, the basic premiums are more expensive.

Similarly, you cannot combine PTA with critical illness (CI) cover - which pays out a lump sum in the event that you contract any of a number of serious illnesses. Conventional life assurance is often sold with critical illness built in.

A third restriction of PTA is that you cannot opt for an income to be paid to your dependants if you die. Unlike conventional life assurance, PTA can only pay out a lump sum on death. Liverpool Victoria is the only insurer that currently sells PTA on a joint basis - many couples prefer to buy cover this way.

The other issue to consider is that for the purposes of HM Customs & Revenue, PTA is a pension and there are limits on pension contributions and benefits. You cannot pay in more than 100 per cent of your salary in any one year and you may not amass a pension pot worth more than a certain amount - £.1.5m in the current tax year - without facing punitive tax charges. PTA premiums and benefits will count towards these limits.

Finally, Carr points out that, as with all tax breaks, there is a risk that PTA will be withdrawn. "There's a lot of doubt about how long this will last," he says. "Ultimately, this is of most use to higher-rate taxpayers."

These issues aside, Carr says it is at least worth getting a quote on PTA, though don't cash in your current cover until you're sure you can save money.

One problem with dumping an existing policy and buying a new one is that you will have to go through insurers' screening processes again. If you're significantly older, or have had bad health since you last bought cover, your premiums will be higher. Even so, while PTA is slightly more expensive than conventional life assurance policies, the tax relief means it will almost always be cheaper. The savings may be enough to get over the cost of changing policy.

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