Benjamin Franklin once wrote that only two things in life were certain – death and taxes. But what happens if death and taxes occur simultaneously? Although it should be the foundation on which all other financial planning is built, many people fail to plan for death, and for the sometimes crippling taxation which comes with it.
We all love living in Malaysia. The cost of living is low; the weather is warm; and there is wonderful food around every corner! But how would your family be impacted if you were to die? No matter where you live, death can be expensive, and will typically include most of the following: hospital bills, funeral expenses, repatriation of remains and inheritance taxes (IHT).
In most cases, you will be liable for IHT in your country of citizenship, regardless of where you live, and if you have not undertaken the proper planning this tax could be very costly for your heirs. If you leave behind a sizable estate, it is important to do everything you can now to mitigate the effects of inheritance/estate tax later.
Using the UK as an example, a British national can pass the proceeds of their estate to a British spouse free of tax, but there is a “nil rate band” of only £325,000 on monies passed down tax-free to any other beneficiary. Crucially for many UK expatriates in Malaysia, however, “any other beneficiary” also applies to foreign (non- British) spouses in the form of a maximum tax-exempt transfer upon death.
Because even non-domiciled individuals (if resident in the UK) have a £325,000 nil rate band on UK assets, there is an IHT exemption for the first £650,000 of an estate passed from a UK domiciled individual to their non-UK domiciled spouse. A non-dom spouse may also elect to accept UK domicility, which means they can inherit their spouse’s entire estate free of IHT. But if he/she does that, they could be subjecting all of their worldwide assets over and above £325,000 to 40 per cent taxation on their own death.
If your family faces a daunting tax bill when you die, there is one nearly universal way to protect them: life insurance. While the laws are slightly nuanced from country to country, the proceeds of an insurance contract generally fall outside of the estate of the deceased, therefore they are free of income and inheritance taxes.
There are three major types of life insurance to choose from: whole of life, term life and T100. Whole of life combines insurance with a cash/investment element, and while premiums may be quoted as level throughout your life, the rising cost of insurance as you age means a steadily increasing percentage of your cash will be depleted to pay for the insurance. Furthermore, because of the ability to ‘overload’ the policy with cash or investment, all or part of the proceeds of a whole of life policy may actually be taxed.
Of the three, we believe that term life and T100 are the best options, especially if the insurance is safeguarding your estate.
Term insurance is very clear-cut. When applying, you select a sum insured and a term in years. As long as you continue with the premiums, you are covered for that amount until the term ends. There is no cash value, and no return of premiums. Because of its simplified nature, term life is the least expensive insurance you can get.
T100 (or Term-100) is relatively new to the international market, but has been a common policy in Canada for years. T100 is a kind of hybrid. Like term life, the premiums are fixed from day one. Like whole of life, the coverage is permanent (not limited by a pre-selected term), but unlike whole of life, there is no cash/ investment. Once the insured reaches age 100, the policy will pay out in full.
But the need for life insurance extends beyond estate tax mitigation. If you are still building your nest egg and have a family relying on your income, what would happen to them if something were to happen to you, particularly if your income were no longer there to cover the daily living expenses?
Even if there are no inheritance taxes to pay, life insurance provides a tax-free lump sum for your family and peace of mind for you