How to buy life insurance Friendly society life insurance policies
Friendly societies are mutual associations. Like credit unions, they have no shareholders, but rather are owned by their members.
Tax-free investing with a friendly society
Friendly society savings plans offer tax advantages for long-term investments. You can save up to £25 a month, or £270 a year if you pay the premiums once a year, into a friendly society investment, generally a with-profits fund.
This fund grows largely free of tax (like all other investment providers, friendly societies can't reclaim the 10% tax credit on dividends). You choose how long you want to save for - the investment period tends to be between 10 and 25 years.
If the policy is expected to last at least 10 years and you hold onto it for the whole term, you won't have to pay any tax on the proceeds. The tax-free limit of £270 a year is in addition to your annual Isa allowance.
Limits on friendly society tax relief
If you stop paying the premiums before the end of the term, though, you might have to pay tax. If you think you might want to get hold of your cash early, friendly society accounts are possibly not for you and you might be better off with a cash Isa. The Which? Money Compare tables let you search hundreds of cash Isa deals from providers large and small so that you can find a good home for your nest egg.
Life insurance from a friendly society
Most friendly society tax-exempt savings plans include life insurance cover. This means that if you die during the term of the plan, your estate will receive the guaranteed sum assured stated in your personal illustration, plus any bonuses. As the sums involved are relatively small, it's common for friendly societies to offer life cover without prior underwriting.
In effect, a friendly society tax-exempt savings plan is a type of endowment. Some of your monthly premium is used to buy life cover, which will pay out if you die before the end of the term. The rest of the premium is invested.
Are friendly society accounts savings or investments?
Many friendly societies call their tax-free products 'savings'. However, your money is usually invested in a with-profits fund and charges can be high, canceling out some of the beneficial tax treatment.
- Read our guide to for more details.
When you open a friendly society plan, you'll receive a personal illustration. This will show the minimum you are guaranteed to receive when the plan matures. However, if you stop paying into the policy before the end of the term, you could get back less than you’ve paid in.
Regular bonuses are declared every year and will be added to the value of your policy. Once these bonuses have been added, they can't be taken away. You may also receive a terminal bonus, but this isn't guaranteed.
Friendly society children's savings plans
Many friendly societies offer a children's version of their savings plan. These accounts enjoy the same tax breaks as their adult equivalents. The same savings limits also apply.
As children rarely pay tax on their savings, you may prefer to choose a children's savings account, which has no fees, or a tax-efficient Junior Isa.
Looking to buy life insurance?
If you decide you need advice, make sure you consult an independent life insurance broker.
Which? Financial Services can refer you to an impartial, no-obligation third-party advice service to provide you with the best life insurance or mortgage insurance policy tailored to your individual needs.
Find out more about the life insurance referral service at Which? Financial Services.
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