Pension Term Insurance

Pension term insurance
Pension Term Insurance is a type of insurance policy which uses your pension contribution allowance to save you money if you are a tax payer. This new type of insurance came into effect on 6 April 2006, when the Government allowed tax relief to be claimed on the term insurance premiums at the highest tax rate you pay - by linking the insurance policy to your pension allowance.

Pension term insurance works like this: assuming you are eligible to contribute to a stakeholder or personal pension ?and regardless of whether you actually do contribute or not - you can take out this type of life insurance policy. The Government has set new limits for how much you can place in a pension of?15,000 per year or ?.5 Million per lifetime.

You can use part of your annual limit to pay for life insurance instead of a pension, by taking out cover that counts towards your limit. So you could take out ?50,000 of pension term insurance and then you would only be able to place ?.25 into your pension. The result is you get to claim tax relief on your life insurance premiums ?which will be 22% for basic-rate taxpayers or 40% for higher rate taxpayers. You can use the allowance whether you抮e actually making pensions contributions or not.

There are a few limitations to pensions term insurance. You can only insure yourself, not yourself plus partner on one policy, and the underlying costs of cover will be slightly higher, but certainly less than the savings you are likely to make. Plus policy premiums are only automatically reduced by 22%, so higher rate tax payers need to claim the additional saving on their tax return.

Also, you cannot convert an existing policy into a pension term insurance policy, and cancelling an old policy and setting up a new one might cost more than you will save.
Because pension term insurance is a form of term life insurance, this means that the payments and cover will stay the same throughout the term of the policy. Plus the policy will be in effect for a set term or period of time, and will expire after this, and you will effectively lose your premiums paid if you have not made a claim.