If you have a life insurance policy (or are looking to get one) you may have asked yourself the question, would any life insurance payout be taxed?
However, it isn’t quite a straightforward answer.
The first thing to understand is that when a policy pays out, the payout itself is tax free. In other words, the beneficiaries (the individuals or people nominated to receive any payout if a claim is made on a life insurance policy in the UK) don’t have to (automatically) pay tax on the money.
Whilst the payout in itself isn’t taxable, there may be circumstances where the beneficiaries have to pay tax on it. Although not subject to any specific ‘life insurance tax’, it could be considered part of your estate, which is subject to inheritance tax (IHT).
What will be taken in inheritance tax?
If you believe your beneficiaries are likely to owe inheritance tax on your estate after you die, then it is important to calculate how much that tax bill might be when taking out a life insurance policy. The amount of the payout might not be enough if they also receive a large inheritance tax bill for your estate.
If you want to give any gifts away to your beneficiaries whilst you are still alive, they might still be subject to tax after you die if you gave them away within seven years prior to your death. So, it’s worth being aware that you won't necessarily avoid tax if you were to give away some of your assets before you pass away.
The trust is run or managed by the trustees. It is then the trustees’ responsibility to ensure the beneficiaries receive the benefit of the policy, in the event of a claim. When you put a policy into trust, you effectively give it away to the trustees to look after for the beneficiaries. Usually, the Settlor (policyholder) will also be a trustee whilst they are still alive, so will retain some control, but any actions will need to be signed off by all of the trustees. So, make sure any trustees are people who will protect your interests in the long term.
Why do people put their policies into trust?
1. Inheritance Tax
The proceeds of a policy in trust may not be subject to Inheritance Tax.
The policy benefit does not go through probate when it has been written into trust and therefore can be paid out more quickly.
The policy benefits may have better protection from creditors of your estate should it be placed in trust.
Already Have A Policy?
It’s great if you already have a policy in place, however, are you sure that it still meets your needs? Could you be getting a better deal? If you’re unsure, the team at Cavendish may be able to help get you a quote for a more cost effective life insurance policy.
Get A Quote Online Today
Once you’ve given this information some thought, it’s then really easy to arrange and compare online life insurance. Simply enter your details into our site and we’ll ask the questions we need to generate quotes, so you’ll be able to see what policy and options work out best for you.
Prefer to phone?
Sometimes, it’s easier just to give us a call and speak one-to-one with one of our insurance specialists, who can guide you through the process and support you in choosing the best cover for you and your loved ones.
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