Two readers have responded to articles that appeared recently in Family Money the first about the proceeds of foreign-based life insurance policies being subject to Capital Gains Tax, and the other about the pitfalls of endowment mortgages.
Mr P from Galway purchased a life insurance savings policy in 1951 while living in Trinidad. The insurer was a Canadian company, Manufacturers Life. He moved to England a few years later and then to Ireland in 1966. He kept paying his premiums, but to the London office of the company. In 1995, Canada Life (London) took over the company and he has continued to maintain the premiums.
"You mentioned that should a policy-holder of a foreign-based policy die, the beneficiary my wife in this case would have to pay Capital Gains Tax or inheritance tax on the proceeds. Do I need to transfer the policy?"
The CGT liability applies only to policies taken out since 1993, or if a policy purchased earlier has been adjusted presumably in terms of significant extra funds invested since then. There is probably no harm in our reader asking the Canada Life office in Dublin to take over the administration of the policy.
Meanwhile, Mr O'S from Cork believes he has found a solution to the endowment mortgage dilemma. "While all the comment is usually in relation to either the pitfalls of taking out such a mortgage or the dangers of cashing in an endowment policy early, press comment about early reduction of mortgage debt seems to refer to repayment mortgages only."
Mr O'S is making lump sum payments of £800 a year to his building society to reduce the capital he owes. "I have received a projected maturity value for my policy and it should just about be enough to pay off the mortgage."
His capital payments mean there will be less of the loan for the endowment to pay off and he may end up with a small surplus at the end.
But by his own account, the endowment policy will just about pay off his mortgage if the company's investment projections are correct. Even with some capital repayment, there is still a risk the endowment policy may not produce a high enough return to cover the loan.
Early encashment is not always an ideal solution since there is usually a loss due to high initial charges associated with endowment policies.
But by putting the encashed proceeds of a policy against the cost of the loan and then by paying the same amount that was paid each month when it was an endowment mortgage the homeowner should pay off the loan on time.
