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Can Life Insurance in the UK Pay for Inheritance Taxes?

Getting the right life insurance policy in place to protect your loved ones is essential and it's easier when you have the right professional advice.

Life Insurance and Inheritance Tax

Getting the right life insurance policy in place to protect your loved ones is essential and it’s easier when you have the right professional advice. It’s important to establish what life insurance is and to understand the implications of inheritance tax in the UK when a life insurance claim pays out. Currently (2021) There is no set life insurance tax applied to the money paid out to beneficiaries.

It was once the case that IHT applied to mainly the wealthy but now a greater portion of people in the UK are liable to pay IHT upon their death.

Once life insurance revenues are paid are they taxable? Who pays the tax and why? How much would the inheritance tax be and is inheritance tax on UK life insurance applicable? A good structure to a policy will mean that payouts for your nearest and dearest will be a relatively easy process in the even of a claim. Life Insurance may be subject to Inheritance Tax if it is part of an estate. Essentially, the question is: does the beneficiary pay inheritance tax on Life Insurance?

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Is Life Insurance Taxable? What about Inheritance Tax?

There is no set UK tax that affects a life insurance payout but there are factors where much depends on the value of the estate which is left behind for your nearest and dearest. If the total value of your estate is in excess of £325,000 (and if divorced or single) then no IHT is paid.

Also, if you are a married / widowed beneficiary receiving an estate of more than £650,000 IHT can then be determined at 40% of the value of your estate. So, IHT is charged only on the part of your estate that’s above the threshold.

All IHT activity and responsibility should always be reported to the HMRC. In the event of someone’s passing, Inheritance Tax (IHT) is a tax which is applied on the net value of an person’s estate. Perhaps there are investment funds, high costs and family legacies included in the estate?

Many life insurance plans are part of the estate you leave behind for your loved ones. Many have a life insurance policy which is written in trust (Prime recommends setting up a trust fund).

Types of Life Insurance

There are three main types of Term Life Insurance that need to be considered – level, decreasing, and whole of life / increasing term insurance. Often, it is best to have a combination of these insurances to improve the cover. Level term and decreasing policies are taken over a specific time period and are generally the cheapest and simplest form of life assurance.

  • A level term policy will pay the same lump sum amount upon death no matter when this occurs during your policy. Therefor if you die on the first day of the policy, you get exactly the same sum as you would if you died near the end of the policy. Throughout, the sum you are compensated for remains equal-hence the name.
  • A decreasing term policy on the other hand will pay out more at the beginning of the policy than it would at the end. As the sum assured reduces through the term and is more commonly used to cover a repayment mortgage. often used to cover a debt that shrinks over time, such as mortgage repayments.
  • Whole of life insurance is different from term assurance as it will pay the sum assured on death regardless of what age that occurs. Whole of Life Cover will generally cost more than term assurance as you will be covered until you die. Your family can make the most of a payout should an insurance claim be made.

Level term and decreasing policies are taken over a specific time period and are generally the cheapest and simplest form of life assurance.

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A Life Insurance Policy Written in Trust

  • It is the policy holder who decides how the life insurance payout is shared out and to whom. For example, some of the funds may be released immediately, and the rest payable on a date and time of choice.
  • There are many types of IHT so it can be a very complex process if a life insurance policy is not written in trust. For example, probate issues can take months to resolve especially if the policy holder did not leave a will; so having a life insurance policy written in trust can make matters much easier.
  • There are many IHT forms involved when paying inheritance tax, and the fees involved employing professionals to handle them can soon mount up. Dealing with inheritance tax for life insurance can be very complex.

Essentially, the Life Insurance payout will go into a trust. A trust is managed by set trustees (assigned by you – this could be a family member for example, or a solicitor). The policyholder gets to choose the conditions of who gets what, where it is paid and to whom any funds are paid.

A policy written in trust will release funds faster and the process will have less hassles.

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Approximately 6% of Life Insurance Policies are Written in Trust.

A new or an existing life insurance policy can be written into trust. Having a trust can bypass the complexities of having to deal with inheritance tax, but policies written into trust (or transferred into trust) means getting the right professional and legal advice to help you navigate the hurdles involved.

life insurance policy in trust

When a policy is in trust, everything associated with the terms of the trust is created by the policyholder. The terms of a trust should be clear and an informed decision should be made before making a decision.

Written in Trust – What Happens Next?

The policyholder does not retain control when a life policy goes into trust. When trustees are assigned control (a policyholder can also be a trustee), the process cannot be cancelled and the terms of the particular trust used cannot be changed.

Again, it is important to make a fully informed decision so the best possible protection for your loved ones can be put in place.

Prime Financial Solutions and Mortgages Services

If you need help with Life Insurance and any of the following, Prime can help – telephone 01942 665 436:

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You always have an exceptional FCA approved team of life insurance & mortgage specialists with you on your journey with Prime from day 1. We provide excellent one to one services tailor made to your own individual needs and we make your time with us hassle free – we do all the heavy lifting.

Prime is proud of the reputation it has built over many years, and this is largely reflected through the positive reviews we receive from customers in Wigan, the UK, on Trust Pilot and online.

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Life Insurance is the simplest, most popular and best way to ensure your family is taken care of in the event of your death and managing your policy in the right ways is all important.

You can find out more about us here, Complete our quick contact form and should you need help with setting up a UK Life Insurance policy, our friendly team here at Prime can help. If you would like to have a free Life Insurance Quote click here and you’re welcome to telephone us during office hours 01942 665 436 where you can speak with one of our dedicated Prime advisors.



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