At last, really cheap life insurance – but there are strings attached. Aren’t there always!

As from 6th April 2006, if you pay into a pension and at the same time pay for life insurance cover, then you can use your pension contribution allowance to reduce the cost of your life insurance. This is achieved by receiving 22% tax relief on your life insurance premiums if you’re a standard rate tax-payer, and relief at 40% if you’re a higher rate tax payer.

The combined pension and life insurance premium you pay, will automatically be reduced by 22% by the pension provider but if you’re a higher rate taxpayer, you’ll have to claim the balance to bring the relief up to 40%, on your end of year self-assessment return.

But there are three conditions:
• The company providing your pension must also provide your life insurance and be paid as a combined premium.
• Your pension fund plus the insured value of your life insurance, must not exceed £1.5 million.
• Your annual pension and life insurance premiums must not exceed £215,000.

In practice the life insurance savings will not be quite as big as you might otherwise expect. This is because the underlying cost of the life insurance will be a bit more expensive than a stand-a-lone policy with the same company and the odds are that the company providing your pension will not be the cheapest on the life insurance market. Furthermore, you will not be able to buy a combined pension/ life insurance policy online - so you’ll will miss out on the Internet’s discounted prices.

Having said all of that, if you’re a higher rate tax payer your tax savings are bound to ensure that your life cover is a real bargain! If you are a standard rate taxpayer, before you buy, we think you’d be wise to get an online quote to compare against the price for the pension associated life insurance.

There are also some other points you probably need to know. Firstly before you ask, no you can’t convert your existing life insurance policy into a combined pension purchase. The tax relief is only available when you take a pension policy and life insurance as one combined purchase.

Secondly, you can only take out life cover for yourself. Joint policies aren’t available as a pension/life insurance package.

And you can’t add critical illness cover to your life cover. Critical illness cover pays out a lump sum if you are diagnosed with a specified illness listed on your policy. If you also want critical illness cover, it’ll have to be a normal stand-a-lone policy.

Finally, if you’re tempted to buy a pension life insurance package and cancel your existing life cover, a few words of warning. The fact that you will now be older than when you first took out your existing life insurance policy, means that your premium rate will be higher. Furthermore, the premium for your new policy may be loaded due to any medical conditions you’ve developed since taking out your original policy. Even if you’ve simply put on weight, you could find that your premium is loaded. In extreme medical cases, your proposed pension provider might even refuse to provide you with life cover. All this means that you must obtain written acceptance from your pension company and compare the after tax cost, before you cancel your existing life insurance policy.

Life Insurance FAQ’s
More Life Insurance Articles
Request a Life Insurance Quote