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Are There Any Tax Benefits with Life Assurance?

There is a saying about death and taxes. But are there any tax benefits when you have life assurance? The good news is, there are indeed tax breaks with life assurance.

Annual Bonus/Earnings Accumulation

As a background, life assurance is an insurance product with an investment component. As you pay for your premiums, a portion of this is invested by the company. Depending on how well the company performs by way of investments, you can potentially earn annual bonuses that can either be withdrawn or accumulated and allowed to grow within the insurance company’s coffers. If you opt for the latter, the income you receive from the annual bonuses is considered nontaxable as long as it is not withdrawn. This allows your money to grow at a faster rate, since taxes are deferred.

Tax Relief

It used to be that a certain portion of one’s net relevant earnings is allowed to be used to purchase pension term assurance. Before April 6, 2001, it was up to 5% of a person’s earnings that was allowed to pay for premiums for pension term assurance. After April 6, 2001 up to April 5, 2006, this was changed to up to 10%.

However, there were new rules on “A” Day (April 6, 2006), where the tax relief will be based on the entire amount of the premium. That means that, depending on your tax bracket, you can potentially get 22% tax relief (for lower brackets) or 40% tax relief (for those on higher tax brackets). However, this is only if you get the life assurance coverage through a pension fund. For instance, if you are paying premiums of £40 a month, you will only need to pay £24 if you are part of the higher tax bracket.

In addition, employers are allowed to provide death benefits (that are counted as tax-free) for as much as an amount equal to of a new pension lifetime allowance. This means that employers can now negotiate for higher sum assureds from their employers.

So, as you can see, life assurance has added benefits that you can actually see in your tax payment forms! (Please note that these are general statements. It is best that you consult with your accountant to see how this applies with your particular situation.)

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