A gift inter vivos policy is set up with cover of 拢200,000 in the first year....?

A gift inter vivos policy is set up with cover of 拢200,000 in the first year. How much cover will apply in the final year of the policy?

A. 拢34,000

B. 拢40,000

C 拢80,000

D 拢120,000



I know the answer but I am interesed in the working out. How did u get to your answer?A gift inter vivos policy is set up with cover of 拢200,000 in the first year....?To understand Inter-Vivos you have to realise what a PET is.



If someone gives a gift to another person this is a Potentially Exempt Transfer (PET). If the first person dies then the second person incurs a tax liability of 40% - this liability gives them an insurable interest in the life of the donor. In this case the gift must be 拢500,000.



However each year that the donor lives after giving the gift reduces the liability to pay tax until after 6 years there is no liability remaining - the gift is tax exempt. The insurable interest therefore decreases by a sixth each year until in the final year it is a sixth of the original liability.



Thus an inter-vivos insurance policy is a decreasing term policy on the life of the donor by the recipient for the tax liability on the death of the donor.