It’s Not What You Do, It’s The Way That You Do It!
So you have life insurance that covers you where you live (Expat Life Insurance) congratulations that’s a great start. What we want to know now is how did you set it up? The likelihood is you’re the life assured, policy owner and nominated your loved ones as beneficiaries. This is the usual way people will set up their life insurance policy and unfortunately some advisers too. You may have already guessed that this isn’t the best way to do things. Now we’re going to explain why.
The point of a life insurance policy is to make things easier for the ones you love when you’re gone. It’s not going to benefit you because the policy will only pay a claim if you’re not around anymore. So why do you need to be the policy owner as well? Obviously, the answer is you don’t and by doing so, you’re creating some serious issues for your family. You’re reducing the effectiveness of the life insurance and possibly increasing any inheritance tax liability.
Why is this the case? Well when you die all the assets that you own have to go through probate. This is also the case even if you’re passing everything to your spouse. Any joint assets will automatically move over to them and won’t require a grant of probate. The latter won’t apply to the proceeds of your life insurance policy if you own it. This means the executors of your estate have to obtain a grant of probate before beneficiaries get the life insurance policy proceeds.
If everything is straight forward then realistically you’re looking at least 3 months to get this sorted out. Though things probably aren’t straight forward, for a start you’re living in another country. This may mean that the executors also go through probate in your country of residence or get permission to process the estate elsewhere.
There may also be some inheritance tax to pay in one or both places which will slow things down even further. At best you’re looking at 6 months though realistically you should expect 12-18 months. All this assumes that you have a will which names your executors and how they should divide your estate gives the details of how your estate. If you don’t (more common than you think) then who knows though they probably wouldn’t sort it out within 2 years. We’ve heard of situations rumbling on for over 10 years.
Don’t Waste It
In addition to delaying access to the benefits from the life insurance policy, there is another issue to this setup. This is that you’re wasting your inheritance tax allowance and pushing your estate closer or even above the threshold. We’re not just talking about your home country your estate could also have a liability to pay in your country of residence. If you own the policy the death benefit forms part of your estate and is therefore assessable for inheritance tax.
How To Fix It
All of this is completely unnecessary and avoidable, even if you don’t have a will (though we don’t recommend this). It isn’t difficult to do and it won’t cost you anything.
One way is for you to be the life assured and for your spouse to be the policy owner. This means that in the event of a claim the life insurance policy pays the proceeds straight to your spouse. They fall outside of your estate meaning no need for probate and they’re not assessable for inheritance tax back home or where you were residing. Whilst this method is more preferable it still isn’t perfect.
This is because if the policy owner dies before the life assured it would fall into their estate. As long as the life assured were still alive it wouldn’t have any value (we’re talking term insurance) so it wouldn’t affect inheritance tax. This doesn’t mean to say that it wouldn’t at a later stage though we’re not getting into that today. It would mean that the life insurance policy would have to go through probate and if there isn’t a will then this could take time. It could also mean that the life assured becomes the policy owner taking a step backwards.
Another alternative is to write the policy into trust. The good news for everyone is that you can do this at outset or once the life insurance policy is set up. So if you have already set your policy up in this way there is a fix. Most if not all insurers will have a suitable trust available. Writing the policy into trust will mean benefits fall outside your estate and benefits pay on the production of a death certificate. No delays, no probate and no inheritance tax.
If you have critical illness or long-term care benefits on the policy things are a little more complicated and you may need to take some advice on the best option.