Life insurance holders with policies taken out before March 1984 may find their premiums increase or the linked benefits they get reduce from 6 April, as the Government's stopping a long-standing subsidy it pays to providers.
Currently, insurers and friendly societies can claim Life Assurance Premium Relief (LAPR) payments for qualifying life insurance policies taken out on or before 13 March 1984, which are paid from post-tax income.
By 'qualifying', this refers mainly to long-term policies with regular premium payments that have a savings element in addition to the life insurance.
Also, while LAPR refers to assurance, now most people call it life insurance – you insure something that may happen, while you assure something that will happen – so for ease, we refer to it as insurance in this article.
It's important to understand there are two separate groups of people here who are affected:
- Life insurance policy holders (as described above) qualify for tax relief of 12.5% of the premium paid, capped at £1,500/year, or a sixth of total income – whichever is greater. Insurers can then claim the difference back from HM Revenue and Customs (HMRC).
HMRC says the average amount of relief claimed per policy is around £14/year. For instance, someone with a premium of £100/year will pay £87.50 while the insurer pays the 12.5%, or £12.50.
- Consumers with an employer-financed retirement benefits scheme where the life insurance premium is paid by an employer, get income tax relief of up to £12.50 per year.
HMRC says very few people are likely to still be eligible for this element of the relief.
From 6 April 2015, the relief on both individual insurance policies and on an employer-financed benefits schemes will be scrapped.
This means that for many policyholders, the amount they'll need to pay for the next instalment after this date may increase by the amount of the relief withdrawn (12.5%), or benefits linked with the policy (such as those paid on maturity or death) may be reduced as the insurers will want to recoup the cost of the cover.
The exact outcome for policyholders will vary from provider to provider. Zurich for example, which has 30,000 policyholders with the individual insurance element who benefit from LAPR wrote to customers earlier in the year to let them know what their new increased premium will be following the changes.
It adds that if customers choose to stop their policy, they will get the current value of their investment.
Aviva which has "a number of long-standing policyholders" benefitting from LAPR says it has also written to those affected to let them know about the change in Government policy. It adds that the letters explain that their premiums will increase as a result.
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Premiums could rise by around 15%
This change only affects policies taken out on or before 13 March 1984 because it was scrapped for insurance policies issued on or after 14 March 1984.
It was announced in December 2011 that the relief would be axed for existing policies from 6 April 2015. When this announcement was made, the Government estimated it would save around £5 million with around 1.5 million policies and 70 insurers and friendly societies likely to be affected.
Insurer Cavendish told us that based on the £5 million saving figure, it expects around 350,000 policies will be affected, although it does not have any customers itself that benefit from LAPR.
It adds that policyholders could see an increase in their premiums of around 15%. For instance, someone with a premium of £100/year will pay £87.50 while the insurer pays the 12.5%, or £12.50.
But once the relief is scrapped, the policyholder will need to pay the entire £100/year. The increase from £87.50 to £100 represents a 15% rise.
What are your options?
Rebecca Rutt, MoneySavingExpert.com's senior insurance writer says: "If you're affected by these changes you have a few options. If you no longer need life insurance you could scrap it – cancelling is a way to avoid paying a higher premium.
"Another option is switching and ditching. Depending on where you bought the policy from you could've over paid – insurers and banks charge the most whereas discount brokers are far cheaper. It might be possible for you to save by switching although, there's no guarantee.
"As you're now older – and if you've had health problems – you're deemed more risky so any savings made by switching could be demolished by a more expensive policy. Yet there's no harm getting a quote, especially if you've since quit smoking.
"But at the end of the day if you're unable to save by switching, and want to keep the policy, your only option is to carry on paying."
In response to the move by the Government, the Association of British Insurers said that if you pay by direct debit or standing order, you may need to contact your bank to set up the new monthly premiums (should they increase) – if you don't pay the full amount your policy could be affected.