As an American abroad it can be difficult to come to terms with both a new way of life and a totally foreign financial sector. The American and British systems although they share many comparative terms and policies are executed in different ways and have to comply with government legislation and tax laws. Inheritance tax and capital gains tax both potentially affecting the amount of money either you or your family will receive when you cash in your policy or when your estate is being calculated.
In the United Kingdom income and gains tax is charged at a rate of 20 per cent when your UK-based life insurance investment matures or is cashed in by you the policy holder. this tax is taken from the policy before it is paid out. Capital gains are taxed at a maximum of 15% in the United States. Your descendants pay an inheritance tax at a rate of 40% on your life insurance policy if you are over the government regulated threshold. This year the limit for exemption is £325,000, but as of 2007 married couples and registered civil partners can increase the threshold on their estate when the second partner dies to as much as £650,000. If you write your policy ‘in trust’ then the person specified in the policy will not pay inheritance tax on the ‘sum assured’, as the pay-out is omitted from the total estate calculation.
There are a number of different types of policies that are available, including investment policies, which are generally charged at a higher rate but will have a higher maturation amount. These policies although called investment policies should not be regarded as an investment for yourself unless you choose to cash in the policy early in which case you will pay capital gains tax on the amount. With hundreds of policies on the market you should look at comparison sites like MoneySupermarket before you make payments or decide on a policy. With a number of Americans abroad it is essential that they familiarise themselves with laws and financial systems before they agree to policies.
40% tax when you leave it to your descendants thats a lot of money gone from the life insurance policy before they see a dime. That seems a bit much to me and makes me wonder if it would be worth it. I mean i would love to leave some funds behind for my family but not a the cost of losing so much. I was thinking of moving aboard appears I need to look more at these types of things then I have in the past.
It’s good to read financial advice targeted towards American expats. We’re too often ignored, even though there are 4 to 6 million of us — which is a higher population than in most US states.
Hey Mark,
Long time since I’ve blogged and therefore visited your site. I see you haven’t blogged in 3 weeks, hope all is well with you. I have ample insurance for my son and I but my oldest brother, who lives in Brazil, has none. Need advice about finding the best insurance company and policy for a man his age (58), in the event of his demise. I was told that since my other brother works for United Airlines, that they would fly my older brother’s body in as a courtesy. Will have him look further into this and again looking for some advice on the best policy for a man in his late 50′s; and perhaps how much coverage. Hope this is clear, thanks…