It is naturally very sensible to take out a life insurance or term assurance policy to protect the finances of your loved ones after you are gone. It is often said there is no life insurance tax as the life policy payout is a ‘tax-free’ lump sum. This statement by itself is only half true.
Is there inheritance tax on life insurance payout?
You should be aware that if the policy is not set up correctly then your family may have to pay inheritance tax of up to 40% on that policy payout. However, it is quite simple to avoid this possibility simply by writing the policy in trust.
A trust is simply a legal device that allows you to keep some of your assets separate from your estate, therefore avoiding inheritance tax. There is no IHT because the money in the trust belongs to the beneficiary and not to you as the policyholder. If you would like more information on setting up a trust please see our page on life insurance trust.
Avoid tax on life insurance by writing in trust
When you write a policy in trust the life policy payout stands outside of the estate of the deceased and therefore is not subject to inheritance tax (which stood at 40% in 2009 for estate values in excess of £325,000).
As independent insurance brokers we are be able to assist you with a life insurance trust to help you avoid the life insurance payout becoming part of your estate and potentially liable to inheritance tax.
If you are taking out a joint term life policy you do not need to worry about inheritance tax or forming a trust as the payout will automatically go to the second life upon the death of the first life, and will therefore stand outside the personal estate of the deceased and thus not be taxed.
You can find more information regarding inheritance tax planning at the HMRC website.
