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Life Insurance with Savings Plan

It’s feasible that many persons looking for financial protection for loved ones may struggle to see the benefits of life insurance. After all, the different policies may not suit the ideals of the prospective policyholder.

On one side, you may not get a payout if you don’t pass within the agreed term. The other is that you might overpay your premiums your entire life, getting a pay out far less in value than what you’ve paid into the policy.

So are other options yield benefits that don’t necessarily involve passing away? Life insurance with savings plans may be the happy medium, offering financial protection and investment opportunities.

This guide will define the policy and all the most frequently asked questions.

What is a Life Insurance Savings Plan?

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A life insurance saving plan is a life cover policy where holders put away money each month into a savings and investment fund. It functions much like a standard life insurance product because your beneficiaries will receive a payout upon your death, only that it’s not a fixed amount.

You’ll find that the life insurance savings plan gets commonly referred to as a ‘tax-exempt savings plan’ or ‘endowment policy’ by multiple insurers. These policies are savings plans with life cover features bolted within them.

The amount paid in the event of your death is a tax-free lump sum from the final figure of the plan. We’ll explain more about how the life insurance savings plan works below.

How Does a Tax Exempt Savings Plan with Life Cover Work?

There are a few general principles to a tax-exempt savings plan and why the policy is an attractive prospect. The product offers a solution to those who see traditional life insurance as an unnecessary expense in their budget. It builds a savings pot alongside giving loved ones financial protection.

There are a few general principles to a tax-exempt savings plan and why the policy is an attractive prospect.

The core points that distinguish the plan from standard life insurance are:

  • Save a fixed monthly amount for a defined term.
  • Get a guaranteed minimum lump sum with bonuses (pending investment performance)
  • The lump-sum you receive is tax-free.
  • A guaranteed sum will get paid to your loved ones should you pass within the agreed term.
  • Options to withdraw savings (though not recommended)

The tax-exempt savings plan gives policyholders peace of mind that not only will their loved ones receive a guaranteed payout in the event of their death. But they can also receive additional funds with the extra savings pot. So let’s break down how the policy works.

Your money will get invested in a series of different assets.

Prospective policyholders will decide on a plan with their insurance company, choosing how much they want to save and for how long. The most common term period is ten years. However, younger persons can choose a more extended period to maximise their potential return.

The money you decide to invest every month gets placed into an investment fund that potentially provides a healthy return on the cash, pending their performance. These assets include shares, bonds, properties, and more, managed by professionals that carefully mitigate risk.

Choose how long you want to save your money.

It’s up to the client to choose the term of how long they want to save their money, but there are limitations. Prospective policyholders can choose anywhere from 10 to 25 years, though age is a significant factor.

Most insurers will have an age limit of 65 for the policy. If you’re 55, you’ll be able to save for the number of years leading up to your 66th birthday.

Put a modest sum away every month.

Clients will choose the amount they wish to put away every month. Generally, most will pay between £9 and £25 monthly, whereas the latter figure is the maximum amount insurers will allow saving.

The more that gets paid into the tax-exempt savings plan can yield a higher return. Policyholders will also get presented with options on how to manage the monthly payments, where the choices are below:

  • Profits Basis – Allow the insurer to make investment choices on your behalf.
  • Unit Linked Basis – The policyholder decides where the monthly payments get invested.

Whichever you decide, you can take solace that your money is in a safe place. All competent insurers will have protection from the Financial Services Compensation Scheme (FSCS). You’ll receive 100% of your claim should the provider be unable to meet their commitments.

Build a respectable sum from the savings scheme.

Clients’ monthly payments get split between contributions towards life insurance and the investment fund. That means the plan secures a guaranteed payout upon death within the agreed term with the bonuses of savings return.

The savings accrued from the scheme can end up with a healthy pot on top of the guaranteed payout for your loved ones upon death. However, we must note that all investments are a risk, and returns on your savings are not guaranteed. The final amount depends on the performance of the investment fund.

Your loved ones receive your agreed life insurance payout plus bonuses in the event of your death.

Suppose you pass away before the agreed term has ended. In that case, your beneficiaries will receive a guaranteed sum outlined in the policy. As the policy name suggests, the payments will be tax-free, where the cash accrued from the savings combined with the payout is free to use as the recipient pleases.

Many insurers will offer a guaranteed minimum return on savings, giving the policyholder confidence in their life insurance plan that they didn’t have before.

The tax-exempt savings plan can be an excellent way to make your life insurance policy more beneficial to yourself and your loved ones. However, we’ve mentioned that all investments pose a financial risk.

Let’s dive into these risks to understand the potential pitfalls of a tax-exempt savings plan.

What are the Risks of a Tax Exempt Savings Plan?

We compare plans from the leading life insurance providers

Saving money in principle would never seem like there are any risks involved. However, the tax-exempt savings plan puts your monthly payments into an investment fund where the value can change for better or worse, ultimately leaving some risk.

Most policies will have the insurer manage the savings portion of your money. That means they will choose where they believe the funds will perform best and yield the maximum return. Some plans may allow clients to decide where to place their investments. However, having professionals manage money may suit best without prior investment knowledge.

Whether it’s yourself or the insurer that manages your money, there are risks of the savings pot underperforming. You may not see a return on the investments should the assets not perform exceptionally well. That means the final amount paid out on your plan may be lower than desired.

The risks of a tax-exempt savings plan get minimised by two core factors. The first is that most insurers will offer a guaranteed return and a life insurance payout should you pass within the agreed term. Second, all competent providers have backing from the FSCS, assisting clients in the rare occasion anything happens to the company.

Expert brokers can offer assistance if you wish to know the risks of a life insurance savings plan with particular providers.

So now we’ve covered how the plans work and the potential risks; how much will it cost to get a tax-exempt savings plan with life cover?

How Much Will It Cost to Set Up a Tax Exempt Savings Plan with Life Cover?

Apart from your monthly payments into the plan, a few costs are involved in getting the ball rolling. Almost every provider will have some administration and management fees involved in their tax-exempt savings policies with life cover.

The most common costs are below:

  • Processing fees and setup costs for the insurer
  • Any charges incurred from bonuses during your contract term
  • Any changes you make on how the money gets invested are subject to additional fees.
  • You might face penalty charges if you decide to end the policy before the agreed term

There may be other setup charges or additional costs to tax-exempt savings plans. You can discover more about the fees incurred by each provider by speaking to expert brokers and finding an affordable policy for you.

So if you’re ready to commit to a tax-exempt savings plan with life cover, what’s the process of taking one out?

How Do I Take Out a Tax Exempt Savings Plan with Life Cover?

Most prominent companies offering life insurance will have a tax-exempt savings plan. Should you decide that the policy is right for you, how do you initiate the process of applying?

You’ll need to query with your chosen insurer and plan about applying, and they’ll return requesting a few details about what they will need to assess. The questions asked are likely to be the following.

  1. Your age
  2. How long do you want to hold your savings plan?
  3. Details about your health
  4. Lifestyle questions like whether you smoke and drink

The application process is usually relatively straightforward. After submitting the information to the insurer, they will process it and calculate your monthly premiums based on those details and desired coverage.

It’s essential to remember that your monthly payments could be higher if the insurer deems your life to be more at risk. The risk factors include whether you have a medical history of ill health and the frequency you drink and smoke (if at all).

Speaking to an expert about your circumstances can assist in finding a plan that suits your needs for the best possible rates. They will compare the market from a plethora of leading insurers, discovering the advantages and disadvantages of each for your review.

So if you’ve secured a preferred plan, you may wonder how much you could earn from the savings portion of the policy.

How Much Could I Get from a Tax Exempt Savings Plan?

Many policyholders would be curious to know how much their savings pot has accumulated after the fixed term. Because of the number of variables involved, such as the monthly amount paid and investment performance, it’s impossible to define a final figure for payment.

However, with most tax-exempt savings plans, you are guaranteed a return at the end of your contract term. You’ll also receive bonuses if your savings have performed well in the investment fund.

Let’s not forget that there’s the life cover aspect involved. If you unexpectedly pass during your term, your beneficiaries will receive a guaranteed payout. But what if you find yourself in need of funds during your investment term? Is there any way to withdraw funds early?

Can I Withdraw Any Funds Early?

Generally, insurers will not allow any early withdraws of funds, both partially or in whole. The plans are made available to accommodate a medium-to-long-term investment, meaning that the value of the savings may be less than you’ve paid into the pot.

The design protects insurers and clients with their investment and drives towards the maximum return with your money. However, if your situation demands a return of the funds, you can surrender your policy. The amount returned to you will be the account’s cash value, minus any insurer surrender fees.

Finally, is a life insurance savings plan right for you considering all the information?

Is a Tax Exempt Savings Plan with Life Cover Right for Me?

Any UK resident up to age 65 can open a tax-exempt savings plan, but is it the right option for you? The most typical clients of these policies seek life insurance for the unexpected. However, they find it tricky to see the overall advantages if they are in good health.

These life insurance savings plans suit the needs of younger adults. They can simultaneously offer financial protection for families should the worst happen while building on a long-term savings plan. The tax-free financial reward at the end of the term often makes the investment more suited for these clients.

Consider your options with a knowledgeable broker who can clarify whether this plan would be the best option for your needs.