Overview

When you plan to buy life insurance, it’s vital to ensure that your loved ones will be financially protected in the event of your death. When we talk about planning how you will provide financial protection and stability for your dependents when you are not with them, it becomes important to know what the UK tax rules are for life insurance. A life insurance policy can reduce the financial burden on your family when you die by paying out either one lump sum or a set of regular income to protect your family.

Facts about life insurance and inheritance tax

In an event of your death, the value of your legal estate is calculated and, above a certain threshold, inheritance tax is charged on anything that you leave for any beneficiary.

The threshold is currently at £325,000, just over the value of the average Greater London property, and anything above this is taxed at 40%.

How to avoid paying inheritance tax on your life insurance?

Sometimes, this cut can be dramatic and reduce the pay-out your loved ones receive quite significantly but luckily, it is possible to avoid having to pay inheritance tax on your life insurance pay-out.

If your life insurance policy pays out a lump sum or regular income to your beneficiary or beneficiaries, and the life insurance money takes your estate above the £325,000 IHT threshold, then the portion of your estate above the threshold will be liable to 40% tax.

Inheritance tax would not normally be charged if your life insurance is paid directly to your spouse, civil partner, or even a charity or community club of some kind, even if the amount in question exceeds the inheritance tax threshold of £325,000.

Know more from experts

If you want to know more about life insurance and inheritance tax, feel free to consult our insurance experts.



We would recommend you to talk to one of our advisers for life insurance quotes.
Any quote that your adviser provides you with will take into account your circumstances, your medical history, as well as your budget!
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