A Terminal Diagnosis and a Group Life Scheme
Daniel, aged 47, is a member of his employer's group life scheme (death in service, 4× salary, £180,000 sum assured) and also holds a personal term assurance policy for £150,000 taken out eight years ago. In January he was diagnosed with a terminal illness with a life expectancy of under 12 months. He has a wife and two dependent children. He is considering:
- making a claim on the group scheme now;
- making a claim on the personal policy now;
- cashing in a small endowment policy (maturity value £22,000) to pay for private treatment;
- writing his policies into trust.
His employer's scheme rules say benefits are payable on death while in service, and the personal policy is a standard term assurance with no accelerated death benefit. Daniel is still working full time.
1. Advise Daniel which claims he can make now and which must wait, and why.
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The distinction is between death benefits and accelerated/survival benefits.
- Group life scheme: this pays on death while in service. A terminal diagnosis is not death, so no claim is payable now. Some schemes include a discretionary 'terminal illness' advance, but the rules quoted do not, so Daniel cannot claim. He should check whether the scheme pays out if he dies after leaving service (some have a short 'continued cover' period) and whether his employer offers ill-health retirement.
- Personal term assurance: standard term assurance with no accelerated death benefit pays only on death. No claim now. If it had an accelerated terminal illness option (common in whole-of-life and some term plans), he could claim early, but it does not.
- Endowment: this is a savings/investment contract. It can normally be surrendered for its surrender value before maturity, though there may be a surrender penalty and loss of terminal bonus. He can access this money now, but should compare surrender value with the maturity value and consider whether treatment costs are better funded another way.
So: endowment - yes, can surrender now (with costs). Group life and term assurance - no, they pay on death only. He should ensure his nominations/trusts are correct so the money reaches his family quickly.
2. Explain the advantages of writing the policies into trust and any pitfalls.
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Advantages:
- Avoids probate delay: trustees can pay out without waiting for grant of probate, which matters with a short life expectancy.
- Inheritance tax: a suitable trust removes the proceeds from the estate, potentially avoiding 40% IHT (subject to the £325,000 nil-rate band and residence nil-rate band).
- Control: the settlor can specify beneficiaries (wife and children) rather than leaving it to the estate and the will.
Pitfalls:
- The trust must be validly executed and the policy assigned correctly; a defective trust gives no protection.
- Group schemes may already be held under a discretionary trust set up by the employer - Daniel should not duplicate or conflict.
- If he has already made a will leaving everything to his wife, the trust may be unnecessary and could complicate matters.
- Trusts have administration obligations (tax returns, trustee duties) and periodic charges can apply to some trusts.
- He should take regulated advice; a trust is not a substitute for a will.