Partner died, life insurance & benefits

[chazzbusby]

Hi,

First of all apologies if this is the wrong section, please point me in the right direction if so. I am looking for help regarding single mother benefits and specifically how they are affected by a life insurance payout. Briefly, the situation is:

A friend of mine was due to marry her partner but he died suddenly prior to the wedding. They had two children together who are now 3 years old. Her partner did have life insurance and they are due to receieve £35K as a payout from his policy.

What I'd like to know is how this payout affects her child tax credits and housing benefits. She has been advised that all £35K has to go into a childs trust fund and be locked away until they are 18 - if not she will lose all benefits and be liable for prosecution for fraud. This strikes me as wrong.

Any help would be greatly appreciated.

The £35K will affect means tested benefits. Rightly or wrongly. She could use it to pay off a mortgage. Not sure exactly how much savings are allowed these days. But she could keep the maximum savings allowed and put the rest away for the children. But not sure this would be wise even with low inflation.

I think that could be right. It is terrible in such circumstances. They should be able to use it to make what will now be a hard life a little easier but I this think you are not able to receive benefits if you have savings. Makes life insurance a bit useless for those who would need to rely on benefits should their partner die.

Unless the will specified it was to be put in trust for the children then it will be deemed as deprevation of capital and any benefits will be based on the fact that she has intentionally moved the money to gain benefits and therefore there will be a huge period of time she wont have any money for.

Surely the point of life insurance is to cover the period of adjustment and living costs whilst plans are made for the future with regards to work etc.

Surely the point of the 35k is that she won't need benefits and instead will put this to good use paying her bills until she is able and ready to start work.?

It's such a large sum of money she could use it when she feels able to maybe retrain if she wanted to change career.

I think HappyMummy is correct. If she has cash/savings in the bank then this needs to be taken into account for benefits purposes. Why does it strike you as wrong? If he was alive and this was his wages?

'She has been advised that all £35K has to go into a childs trust fund and be locked away until they are 18 - if not she will lose all benefits and be liable for prosecution for fraud. This strikes me as wrong.'

So the taxpayer should foot the bill for her to sit on benefits whilst she keeps £35K? How is that right?

She needs to use the money to support herself and children until it either runs out or she gets a job.

Socking it away, depending on how it's done, is wilful deprivation of capital and makes a person ineligible for benefits because they are a safety net for people with very little to nothing, not because you don't fancy using your savings to support yourself.

Does she have a mortgage? If so, could she use this to pay some of it off, or would that be deprivation of capital? If not, then it seems sad in the first instance that she would lose benefits, since presumably the point of life insurance is to cushion the blow of losing your partner. But - benefits have to come from somewhere, so bottom line is that if you have some money, wherever it comes from, you won't be eligible for benefits until it's all gone.

I have wondered similar things too - DH and I have Life Insurance which would pay out just over the mortgage amount, in the horrible instance something happened. We don't get any benefits except tax credits, so I wonder what would happen if one of use died and the other used the insurance to pay off the mortgage?

Obviously with no mortgage payments, and the survivor working, we wouldn't really need most of the tax credits, but I do wonder how it would work - what if, eg, the survivor was too stressed to work for a while? And if the mortgage was paid off with the insurance sum, but they put that down as deliberate deprivation, does that mean the survivor would never get tax credits or benefit in the future? Even with no mortgage, with only one of us working and 3 kids in childcare it would be a struggle with nothing at all.

Hopefully it will never happen but it would be good to know.

This is my non-professional understanding...

ISA's aren't taken into account for tax credits so as of July £15,000 can go into an ISA. Of the remaining 20k she will have to declare 14k (6k savings allowance) what ever interest she earns as income so at say 10%(which would be amazing at present) thats £1400 income over the year which would effect her tax credit payment by a reduction of £0.41 for each pound so £574 reduction in her tax credit payment. Assuming my basic understanding is right. Then next financial year she can put another £15k in and have no extra earnings to declare though it'd take another year for the payments to return to current levels.

For housing benefit if you've got any savings over £16k you don't get any.

Universal credit due in 2017?, Replacing tax credits, is going the same way as other savings based benefits so you won't be entitled if you have more than £16k in savings. However there is ment to be transition protection for those going across from tax credits.

Based on you mentioning she gets tax credits I assume she's working. Could this be an opportunity to get on the housing ladder?

The one other option if she's working is to stick £20000 in a pension - I don't believe pension is deprivation of assets but she wouldn't be able to touch it.

It'd be worth a trip to citizens advice to talk it through.

It is only the INCOME from ISAs that is disregarded for tax credit purposes, not the actual capital. See link. The planning outlined above will not work.

www.which.co.uk/money/tax/guides/tax-credits/tax-credits-income/

Using the lump sum to pay off debt including a mortgage would not be classed as deprivation of assets.

If the lump sum is retained then yes of course it will be classed as savings and her benefits will be affected, as they would for anyone who has that amount of money in the bank.

She could ringfence the money and place in trust for her children until they reach 18 but realistically does she want to give two 18 year olds £35k ? Surely better to use the money now to pay ( for example) the deposit on a house or childcare costs to allow her to work or just to meet their costs of living until such time as the children start school ? Don't forget the funds are intended to replace the lost income of the deceased partner so it should be used for whatever his income would have been used for, ie to support his family.

I am a probate lawyer ( and qualified tax advisor and certified financial planner) and recently dealt with a similar case whereby a lump sum of £50k life insurance was left to the partner of the deceased. She used the £50k towards the purchase of a home for her and her son and her benefits were not affected. Had she kept the £50k in the bank then they would have been.

Has she been advised to put the money in their names to avoid losing benefits or because they are the beneficiaries of the life insurance pay out?

What a shame he died before they got married (that he died at all is of course a shocking shame in itself). If they had been married, your friend would have been entitled to Widowed Parents' Allowance, which, depending on the deceased spouse's NI contributions, pays about £500 per month until the youngest child has left full time education, or the widow/er starts living with a new partner. The rules are changing soon and this payment will only be for the first 12 months following the death of a spouse.

I don't think that the huge impact of having your partner die on you should be underestimated, and it is exactly these sorts of circumstances that society should help the vulnerable and those in need. As well as supporting two bereaved children, your friend will have her own grief to work through, something that will probably affect her to a degree for the rest of her life. Additionally, extra childcare and support will be needed as one parent just simply isn't there any more to give that help. Having your partner die rocks the very foundations of everything you believe and robs you of security.

Yes, this lady may now have £35k (and it would seem sensible to use this where it is most needed - so now, rather than putting it in trust), but I don't think there should be such outrage at the suggestion that she should be doing all she can to protect her assets.

Chazzbusby please could you pass on details of WAY - Widowed and Young to your friend.