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Last Updated: Saturday, 9 September 2006, 13:56 GMT 14:56 UK
Warning on tax-free life cover
By Paul Lewis
BBC Radio 4's Money Box

The demand for this type of insurance has been growing

People tempted to buy life insurance because the premiums now attract tax relief - potentially knocking 40% off the cost - have been warned to take care.

New pension rules which began in April mean that some kinds of life cover which provide a fixed amount over a specified period can be sold under pension rules.

But Tom Baigrie, founder and boss of telephone-based financial advisers LifeSearch, said people could find themselves in a "tricky situation" if they break certain rules.

If they lose the tax relief for any reason then the premiums they pay will be higher than if they had bought regular life insurance.

Tom Baigrie told BBC Radio 4's Money Box: "The basic premium is higher than normal life insurance so if you break the Treasury rules you will end up paying a higher premium than you could have been."

You've got be careful which company you choose
Tom Baigrie, Lifesearch
For example, people who move abroad or lose their job and pay a lower rate of tax could find their premiums went up.

"Some life companies will offer you the chance to correct that at the old rate so you've got be careful which company you choose," Mr Baigrie said.

He said there was also the danger of buying the insurance direct from newspaper adverts or internet sites without taking advice.

Because the insurance counts as a pension - though it is not one - wealthier people could find they breach rules about the total amount paid into a pension or the total amount of their pension "pot".

If so they could face a tax charge of up to 55% on the excess.

The programme was told that there is strong demand from customers for this new Pension Term Assurance.

And Tom Baigrie stressed that, despite its name, it is not a pension and does not have to be paid through a pension: "It's just normal life cover but with tax relief at 22 or 40 % depending on your tax rate, I wish the Treasury had called it 'tax deductible life cover'.

"It's a pure life policy. The company is allowed to claim the tax relief off the Treasury and charge you less for it."

BBC Radio 4's Money Box was broadcast on Saturday 9 September 2006 at 1204 BST.

The programme was repeated on Sunday, 10 September, 2006 at 2102 BST.

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