Cut The Cost Of Life Insurance By 35%

Getting tax relief on your monthly premiums allows you to reduce the cost of life cover by up to a third.

On 6 April 2006, the world of pensions was revolutionised by A-Day, which saw existing pensions regulations replaced by a single, simple, more attractive regime.

It's now ten weeks since A-Day and the market for pensions business is beginning to heat up as more and more new products appear. Indeed, it's now possible for you to use your pension to subsidise the cost of buying life insurance. New rules mean that you can use part of your pension contributions to buy life cover, known as pension term assurance (PTA). What's more, thanks to the tax relief which you receive on pension contributions, PTA is considerably cheaper than conventional life insurance.

Here's how it works: you pay, say, £78 into your pension. Your pension provider will automatically reclaim basic-rate (22%) tax relief on your behalf. This adds a further £22, increasing your contribution to a round £100. You can then invest this £100 into your pension, or use some or all of it to buy life insurance which pays out a tax-free lump sum if you die.

If you're a higher-rate taxpayer, you can reclaim a further 18% via your tax return (or via a PP120 arrangement), which reduces the cost of your cover by £18. Hence, you can buy £100 of life cover for a net contribution of £60. Hurrah!

Here's how it works in practice, based on a survey by Investment, Life & Pensions Moneyfacts of the eleven companies which currently offer pension term assurance. These are the five cheapest providers of conventional life cover and PTA respectively, based on £100,000 of cover over 25 years for a 34-year-old male non-smoker:

As you can see, Legal & General charges £9.55 a month for its conventional life cover, but only £6.37 a month for pension term assurance with 40% tax relief. This amounts to a saving of £3.18 a month over 300 months, or £954 over 25 years.

Note that if tax relief is left out of the equation, PTA is shown to be more expensive than conventional life cover. For example, Legal & General's PTA for higher-rate taxpayers works out at the equivalent of £10.62 a month, but tax relief at 40% brings the cost down to just £6.37 a month. (For a basic-rate taxpayer, the price before tax relief is even higher: £11.03 a month before tax relief at 22% is applied.)

Investment, Life & Pensions Moneyfacts also compared the average premium for conventional life insurance with the average premium for PTA. Again, PTA came out on top, with an average monthly premium of £16.72 for basic-rate taxpayers (19% less) and £13.38 for higher-rate taxpayers (35% less), compared to £20.70 for conventional cover.

Hence, if you don't have any life cover in place at the moment, or would like to cut the cost of your existing policies, the argument for buying pension term assurance is compelling. Think of it as a new weapon in your war against risk!

Finally, to avoid the ten most common mistakes when buying life cover, read Oops, You Bought The Wrong Protection and More Buying Blunders To Beware Of.

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