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Life insurance and tax

Life insurance and tax

From inheritance tax to non-qualifying policies, our easy-to-understand guide looks at exactly what the rules are when it comes paying tax on  life insurance.

Kamran Altaf
From the Life team
minute read
posted 22 JANUARY 2020

Do I have to pay tax on life insurance?

You shouldn’t need to pay income tax or capital gains tax on life insurance - whether the policy provides a lump sum or regular source of income - but your life insurance payout might be subject to inheritance tax so it pays to understand the tax rules on this. 

As a taxpayer, everyone has the right to a tax-free amount on their estate – the value of everything they leave behind when they die – which means your beneficiaries won’t need to pay tax on anything up to that amount. The inheritance tax allowance was frozen at £325,000 per person in 2018/19. For anything above that amount, you’ll be charged a 40% tax. 

What if I die and leave a spouse or civil partner?

When you die, your assets are transferred to your surviving partner along with any of your unused tax-free allowance. Their estate will only be taxed, after they pass away, if it’s valued at more than £650,000.

How could I reduce inheritance tax through life insurance?

You could pay less tax by getting a whole of life insurance policy. This type of policy is typically used to mitigate inheritance tax. That is, the tax which has to be paid by a person who inherits money or property; or is taken as a levy on the estate of a person who’s passed away. With this policy type, any pay-out amount should cover an inheritance tax bill. Learn more about the benefits of whole of life cover.

What else do I need to know about life insurance and tax?

The whole point of having life insurance is to make sure those you leave behind are financially secure, and one way to avoid inheritance tax could be to set up your policy ‘in trust’. By putting a life insurance policy in trust, you’re separating it from your estate, which means it can’t be included when it comes to totting up how much you have in total. 

Any assets in a trust will be overseen by ‘trustees’ who you can choose – they’ll make sure the money you’ve set aside in the trust goes to who it’s supposed to. Trustees can be family members, friends or your solicitor. It’s not complicated to do and your insurance provider should be able to help you.

How does a life insurance pay-out work?

Life insurance is typically paid out when you pass away. It can be paid out in one lump sum or at regular intervals – it depends on your policy. The amount of money paid out will depend on the policy and cover you’ve agreed on with your insurance provider. If you don’t yet have life insurance, our simple guide could help you find out how much cover you might need, based on your circumstances.

Compare life insurance quotes

Compare the Market data from May 2019 found that half of our customers could benefit by paying just £4.83** for a regular monthly premium. That’s based on a £100,000 decreasing term policy over 10 years with guaranteed premiums for a 30 year old non-smoker. 

So why not get a quote for life insurance today and see if you can find a premium that works for you and your family?

**50% of customers could achieve a premium of £4.83 per month based on Compare the Market data from May 2019. Based on a £100,000 decreasing term policy over 10 years with guaranteed premiums for a 30 year old non-smoker.

Compare life insurance

Get a life insurance quote and start saving now

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Get a life insurance quote and start saving now Compare life insurance

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