Often overlooked by both landlords and brokers, taking out life insurance to protect your buy-to-let portfolio is essential and without the necessary protection in place you are potentially putting your entire portfolio in jeopardy.
Despite what you may think, buy-to-let properties won’t automatically be inherited by your family on death. Whether the property was purchased in sole or joint names, the lender is usually within their rights to call on the loans and ask the full mortgage balance to be repaid. Unless your family have thousands of pounds held in reserve or the ability to refinance, this regularly results in the sale of the property and the loss of rental income.
Inheritance Tax (IHT) is extremely common with both private and professional landlords. The value of your estate over £325,000 for individuals or £650,000 for married couples and civil partnerships are taxed at a whopping 40%. With property prices historically doubling in value every 20 years it’s easy to see how buy-to-let landlords could effortlessly leave behind a substantial inheritance tax bill for their family to pay. HM Revenue & Customs require this bill to be settled within 6 months and have the power to force the sale of your properties to settle this, accumulating additional fees.
How would life insurance prevent this?
Life insurance can be taken out to pay your IHT bill (the collective premium paid for the policy is normally a lot cheaper than paying the IHT bill for your own pocket).
- A life insurance policy can be placed into trust (this means the money will fall outside of your estate and be tax free).
- Professional landlords with a Limited company can get tax relief on premiums by taking a relevant life plan
- Gives you security and allows you to plan for the future
- Tailor insurance to cover outstanding mortgage(s) this money can be used to repay your buy-to-let mortgages on your death. This will result in your family being mortgage free, not losing rental income and maintaining the level of lifestyle they’ve become accustomed to.
What to look out for
An advice-based insurance broker who can take into consideration your individual circumstances and offer you advice a recommendation.
Also, a brokerage who is whole of market. This type of insurance brokerage will be able to access the very best premium and every single insurer and with no two insurance companies having the same stance on their decision making it’s vital to have a whole of market broker. Your personal circumstances may mean you penalised with all but one insurance company and if your broker does have access to that insurer, you’re going to be charged a lot more.
Guaranteed premiums are overlooked way too often. By having a guaranteed premium, you are guaranteeing the monthly premium that you pay for your insurance each month. Even if your circumstances or health changes, the monthly cost will remain the same – keeping the policy affordable and giving you certainty of future cost.
Reviewable premiums on the other hand vary from insurer to insurer. The premium is often fixed for the first five years and normally starts slightly cheaper than the guaranteed premium. After you’ve had the policy for five years the premiums are then subject to an increase. Some insurance companies offer a transparent approach and increase the premiums by a set amount each year allowing you to make an informed decision from outset. However, others increase your premium amount at their own discretion. Normally this results in premiums increasing so much that the insurance becomes unaffordable and the cover eventually being sacrificed or cancelled.
[Source: Property Reporter, 30 August 2019]
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