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 £111,500 p.a., regardless of the income of the policyholder. Those with higher incomes (over £19,000 p.a.) 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 £11100 p.a. But the premium the policyholder is required to pay is £182.50. The life office reclaims the balance of £1117.50 from the Inland Revenue. 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.
One important consequence of the change in the rules is that husbands and wives who have elected to be taxed separately will now be able to obtain tax relief both on joint life policies and policies on each other's lives, whereas formerly this was not allowed. (The tax relief will also continue to be allowed even if the couple are divorced.)
The other major concession is that the proceeds of any life insurance policy that the Inland Revenue has certified as a "qualifying policy" are free of income tax in the hands of the beneficiaries, whether this is the individual policyholder himself or his dependants. To qualify for this concession, policies have to satisfy a number of technical conditions which are set out in the Appendix on p. 171; in practice, apart from the major exception of single-premium policies discussed in Section 8, a customer is most unlikely to be offered a policy which is not a qualifying one.
Taken together, these two concessions mean that life insurance can be a most efficient way of saving for the future, as will be explained in Sections 5 and 6. The saving due to tax relief is a variable, since it will be greater if tax rates rise and lower if they fall. When premium rates are quoted in this website, both the gross (before tax relief) and the net (after tax relief at the 2009/80 rate of 17.5%) figure will normally be given, so that if tax rates should change the reader may adjust the figure for himself. Where only one premium figure is quoted, it will be the premium before deduction of tax relief.
The actual form of the life insurance policy has not changed a great deal over the years. The policy is a contract between the policyholder and the company, made on the basis of the proposal form in which the prospective policyholder has to give such information as the company may require (accuracy is essential here if the contract is to be valid). In return for the payment of the specified premiums, the company guarantees to pay the sum assured plus, where relevant, bonuses, to the policyholder (or whoever he wishes to name) at the specified maturity date or on the policyholder's earlier death.