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Age allowance in life insurance policies

People whose income is lower than £100,000 are eligible for the same basic tax allowance. This amount does not depend on the age of the person. Basic tax allowance is the amount of income the person is allowed to receive each year and does not have to pay taxes for it. For the year 2011/2012 this amount is equal to £7,475. This amount is set to increase every year. For example, for the fiscal 2012/2012 year the amount of money is fixed at £8,105. However, once the person reaches 65 years old he is eligible for an allowance that is higher than the amount set by the government. The increased allowance can be received for the whole tax year after the person reached the age of 65. For example, if the person celebrates his birthday in May, he can apply for increased allowance from June.

Eligibility for age allowance

The older is the person the higher is his increased age allowance. For example, according to the latest data people that are aged from 65 to 74 are eligible for an allowance of £9,940 for the tax year 2011/2012 and £10,500 for the tax year £2012/2013. People that are 75 and older can apply for an allowance worth £10,090 for the tax year 2011/2012 and £10,660 for the tax year 2012/2013. However, not everyone older than 65 are eligible for increased income allowance because these allowance are income dependent. People that receive income lower than £24,000 for the tax year 2011/2012 and £25,400 for the tax year 2012/2013 are eligible for the full increased tax allowance described above. However, people that earn income higher than this amount can apply only for a reduced allowance. For every £2 above the threshold the allowance is reduced by £1. People that received income higher than £100,000 loose both basic tax allowance and increased tax allowance irrespective of their age.

  2011/2012   2012/2013  
Age Lower limit Upper Limit Lower limit Upper Limit
65-74 24000 28930 25400 30190
75 and older 24000 29230 26200 30510

The people that receive income below the lower limit of the policy can apply for full increased age allowance. Those people that fall between lower and upper limits can apply for increased age allowance but the allowance is reduced by £1 for every £2 above the threshold. If the income of the person is above the upper threshold he cannot apply for the increased age allowance.

The impact of gains from life insurance policies

Besides regular life insurance polices like Term Life Insurance and Mortgage Life Insurance individual people can buy whole of life insurance policies that offer investment component attached to them. These policies are unique because the person never knows what final life insurance benefit he will receive at the end of the term or upon his death. The reason behind this is that part of the premiums is invested in money market instruments, stocks and bonds. If the investments are made successfully the person receives gains. This is the place where age allowance and other income of the person become vital.

Age allowance is very important thing to consider when purchasing life insurance. This is because all the gains from life insurance policies can have a drastic effect if the person is claiming for age related allowance. These gains are added to other income and if the gains are substantial they can put the person to a new level of income where no ability to apply for age allowance exists. People that are be 65 and older and plan to cash in their life insurance policy have to pay a lot of attention if the gains will have a negative impact on the ability to get the age allowance.

A real life example

In order to understand better how life insurance policies and age allowances are related a simple real life example can be taken. Ben is 69 and his annual income is £22,000. Since his annual income is lower that the threshold Ben is eligible for a full increased age allowance of £9,940. However, Ben also has life insurance policy with an investment component attached to it. The policy lasted for 20 years and during that time the investment company was successful by choose the right stocks to invest the premiums in. Since the initiation of the policy the cover gained £5,000. Ben wants to withdraw the money and use them to cover some debts. However, these gains will become part of Ben’s income after the withdrawal. Because of that Ben will not be able to qualify for a full increased age allowance. His income for 2012 the tax year will be calculated to be £27,000. Like it was mentioned earlier the person looses £1 from his increased age allowance for every £2 above the threshold. In this situation Ben’s income surpasses the threshold by £3,000. Because of that increased age allowance decreases by £1,500. As a result, Ben can only apply for age allowance of £8,440. The higher are the gains from life insurance policies the bigger is the loss of increased age allowance.