Thanks to the latest budget changes, you can now buy life insurance and get tax relief. But the tax relief is only available on a new special type of life policy. You can’t get tax relief on your existing life insurance.

These new life policies exploit provisions in the new Finance Bill and should result in savings of between 5% and 15% for a standard tax payer and around 30% for a higher tax payer.

But you must be aware that there are strings attached! You have to buy an absolutely standard life policy. You can’t add extras such as critical illness cover and the insured sum must be a fixed sum. And only one life can be insured on each policy - it has to be a bog standard, level term, single beneficiary, life insurance policy.

The Chancellor has added more restrictions, but quite frankly, these are unlikely to pose a problem to anyone unless they’re extremely wealthy!

You can’t have one of these new style life policies if your annual life insurance premiums plus the annual contributions you make to your pension fund exceeds £215,000. Furthermore, if the when you die, the value of your pension fund plus the payout from your life policy exceeds £1,500,000, the current lifetime limit set by the Chancellor, then any excess will be taxed at 55%. Payouts from conventional life insurance policies are not part of this calculation.

Standard tax relief on the premiums is automatically collected by the life insurance company so you pay a lower premium which already reflects standard rate tax relief. If you are a higher rate taxpayer, you’ll have to claim an extra tax rebate through your self-assessment tax return. However, once you’ve told your taxman about your policy, you should automatically get your tax relief through your ongoing tax code.

So why are the savings at around 5% to 15% for a standard tax payer and around 30% for a higher tax payer, less than the value of the tax relief? Well, the life companies have to administer the tax relief and there are certain operational restrictions imposed on the insurance companies by the Inland Revenue - and this adds to the insurance costs - so the premiums are a little higher than conventional life policies. But after the tax relief you should make worthwhile savings.

As with all these tax changes, you must be aware that the Chancellor could remove the tax relief at a later date. Having said that, it’s rare for a tax change to be applied retrospectively, so you are likely to be safe. Your income could also drop and move you into a lower tax bracket. This would decrease your savings.

These new life insurance policies are now available from most of the big UK life insurers and life insurance brokers. However, you won’t be able to get a quotation online – you’ll have to get one on the phone from a Life Insurance Adviser.

And just to confuse matters somewhat, these policies are known under a range of names: Pension Term Insurance, Life Insurance with Tax Relief, Life Protection with Tax Relief – but they all mean exactly the same thing.

And just to confirm one common miss-understanding, no, you don’t have to buy a pension at the same time!

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