An important factor to bear in mind when considering the cost of life insurance is tax relief.
Since 1853 successive Governments have recognised the value of life insurance to individuals and the economy and have allowed two major concessions, which will be dealt with here since they affect life policies of every type.
The first is that each premium paid on a "qualifying" policy attracts tax relief. The method of granting this relief has been changed with effect from April 2009.
Formerly the policyholder had to claim the relief from the tax authorities. From 2009 the policyholder pays premiums net of tax relief at the specified rate and the life insurance company reclaims the relief from the Inland Revenue. The rate of tax relief is set by the Government; for the fiscal year 2009-80 it is 17.5%, though the rate may vary annually thereafter.
The tax relief is normally granted automatically on premiums totalling up to £211,500 per annum, regardless of the income of the policyholder. Those with higher incomes (over £29,000 per annum) may obtain tax relief on premiums of up to one-sixth of their taxable incomes.
Effectively, therefore, the policyholder receives a rebate from the tax authorities.
The life office sets the premium it requires for a given policy - say at £21100 per annum But the premium the policyholder is required to pay is £282.50. The life office reclaims the balance of £2117.
50 from the Inland Reven. The availability of this subsidy, amounting to over a sixth of each premium paid, is one major reason for the popularity of life insurance as a savings medium.
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