Tax-Free Income Benefits
THE combination of difficult investment conditions and high rates of income tax has resulted in the formulation of a type of policy designed to produce income rather than a capital sum as the chief benefit. Undoubtedly the main incentive to the effecting of an insurance policy today is the securing of sufficient income either for dependants in the . event of death or for the policy-holder himself in later years. For- merly, when it was possible -to obtain ,nearly. 5 per cent. interest on safely invested capital and incom tax was at a low rate, it was feasible to work in terms of capital sums. The policy-holder could reckon, not without reason, that each kt,000 of insurance would produce an income of nearly LI per week, but now each £1,000 invested will produce not much over £35 per annum, and if the recipient has to pay income tax at • the standard rate, the income is reduced by 25 per cent. straightaway. Then again, where dependants are concerned, there is the difficulty of arranging that the money shall be safely invested to produce a reasonably good income.
INCOME FREE OF TAX.
To meet these difficulties a form of policy was introduced a few years ago under which the sum assured, or at any rate part of it, is payable by instalments over a sufficiently long period to enable the payments to be regarded by the recipient as income. But as in reality the payments are only instal- ments of capital, they are not regarded by the Inland Revenue Authorities as representing annual income and so are not liable to tax. Even if the Inland Revenue Authorities should alter their view of the matter at some future time, this would not entail any appreciable financial hardship, for the remaining future payments under any such policy could be surrendered for a cash payment. This cash payment would represent the full present value of the instalments less future interest, so that, if invested and drawn upon as required, it would provide annual payments of approximately the same amount as before, with no liability to tax except in respect of the interest earned on the capital sum. The Inland Revenue Authorities, on the other hand, would be loSing the tax on the money which would otherwise have been in the hands of the Insurance company. Such tax is chargeable without any rebate except for management expenses, so that the Revenue would lose more than it _would gain; This consideration makes it extremely. unlikely that there will ever be any interference with the principle of the non-liability to income tax in respect of the payments made under these instalment policies.
TAX REBATE ON PREMIUMS.
While on the subject of income tax, it may be well to mention that the premiums on such " income " policies are eligible for the income-tax rebate on the same terms as an ordinary whole-life or endowment assurance poliCy. That is to say, provided the premium does not exceed 7 per cent. on the sum assured payable at death, the premium is eligible as a set-off to the tax on the policy-holder's income on the basis of one-half the rate of tax. This means that to a per,son liable to the full 5s. rate of tax, every £t of premium really costs him only 17s. 6d. The sum assured in the case of a policy where the benefit is payable by instalments is regarded as the total of the instalments, so that the 7 per cent. limitation will very seldom become effective.
_TBE FAMILY INCOME POLICY. - In its earlier forms the so-called " family income policy " provided for a cash sum at death and then an income for the remainder of a stipulated period, generally fifteen or twenty years, if the assured shoUld die during such period, and with a further cash payment at the end of the time. For example; a simple form of this policy provides for a cash sum oF £250 at death, an income of £150 per annum from the date of death until twenty years from the date of the policy—not, be it noted,-froin the date of death—and then a further sum of £75o in cash at the end of the twenty years. If the assured survives the twenty-year period then the policy is merely one for £I,000. payable at death. The cost of such a policy to a man aged thirty is just under £20 per annum, whereas a whole-life policy f6i-£1;666 it the sane age would costabout La _per annum less.. Thus, for an extra £3 per annum the policy gives an income of £150 per annum to dependants for the remainder of a twenty-year period from the date of the. policy.
A SUPPLEMENTARY BENEFIT.
Some of the offices =offer income benefi-ts in conjunction with any of the ordinary whole-life or endowment assurance policies on payment of a supplementary premium, and for an income benefit of t5o per annum, payable for the remainder of a term of twenty years; the additional annual premium is only £7 per annum payable „during the twenty-year period, a modest cost for the supple:nentary benefit.
DEFINITE PERIOD INCOMES.
After all, however, the individual who pays an extra premium for this income benefit may be left with the feeling, if he sur- vives the stipulated period, that he will then have paid for something from which he has derived no financial advantage at all. The individual who pays premiums year by year on fire or burglary policies does not expect that after ten or twenty years' freedom from fires or burglaries the company will be prepared to give him back his premiums or any part of them. He is content to pay the premiums in return for the company's guarantee to make. good any loss which might arise from these contingencies. But a life insurance policy is too often regarded as a means of saving rather than as provision - against a financial risk. To eliminate this view of the income benefit policy of the type described, the income benefit under some more recently introduced types of the policy is assured for a definite period and a further refinement carries the income benefit on for the remainder of life by means of a deferred annuity to commence at the end of the stipu- lated period. In this kind of policy the income is not liable to income tax during the stipulated period, but thereafter when it becomes an annuity payable for the remainder of life it is chargeable to income tax.
Policies of this kind are really most moderate in their cost in view of the valuable cover that they provide. For instance, a man aged thirty, whose wife is of the same age, can secure an income of £50 per annum to begin at age sixty, payable to him if he survives or to his widow should he have pre- deceased her, and this income will continue for the lifetime of the survivor, the cost being about £23 per annum, ceasing at the age of sixty. The chances of a serious reduction of income through the incidence of income tax after the expiry of the period are not great,' for a twenty-year period com- mencing at age sixty will carry the tax-free income on until the age of eighty.
An income of £50 per annum, if limited to the twenty years, means a net sum of £I,000, and its total cost at age thirty cannot exceed £690, so that even on the least favourable outcome to the assured the amount payable under the policy must very substantially exceed its cost.
INVESTMENT PROBLEMS AVOIDED.
Plans of this kind provide an admirable method of ensuring that dependants shall be in receipt of a safe income -for a definite period. It is, in fact, the principle of instalment payments and consequent freedom from income tax and from investment problems that constitute the chief attractions of such policies. They are, perhaps, a trifle complicated at first sight, but a little time given to an examination of their precise terms is well worth while, especially when it is a question of deciding between the merits of a policy which ensures an income benefit payable merely for the remainder of a stipulated term and one which provides _ an income payable for a fixed number of years after death or upon the attainment of a certain age. In these days. when yield of investments and the maintenance of their capital value is so uncertain, these income benefit policies furnish an unrivalled means of saving for the purpose of providing future income either for dependants or for the later years of the policy-