Do beneficiaries pay taxes on life insurance?
Taking out life insurance is a big step in anyone's life, and is naturally filled with questions. One of the biggest questions is: How is the payout on your life insurance taxed, and do beneficiaries need to pay tax on the payout?
Why is tax knowledge essential when it comes to life insurance?
Whether you're a policyholder (you have a life insurance policy), you've been appointed to look after the policy payout in the event of the policyholder passing away (you're a trustee), or whether you've been named to receive some of the funds; paying tax on a life insurance inheritance is a critical question that many people ask.
How do life insurance payouts work?
Most life insurance policies, including level life insurance, decreasing life insurance, and critical illness cover, will pay out a lump sum.
However, other types of insurance policies, such as income protection, can provide a regular income until the end of the policy term or retirement (whichever is sooner).
When taking out your policy, it is crucial to decide what type of payout your loved ones could benefit from most. Decisions like these are why the help of a broker is so important.
At Caspian, our friendly team of UK-based experts can answer your questions and help you find the cover right for you and your loved ones.
Are life insurance proceeds taxable?
A life insurance policy aims to make life easier for your loved ones during a tough time.
A life insurance payout follows a successful claim on a valid policy; your loved ones can use it for whatever they need. For example, they could use the payout to contribute towards the mortgage and keep up with childcare fees, household bills, and everyday living costs.
The main form of tax that can affect the payout of a life insurance policy is inheritance tax. This tax is usually payable on all assets that form part of your estate, which may include any potential life insurance payout.
If you hope to mitigate tax liability, consider placing a life insurance policy under trust. A trust will usually separate the payout from your estate and will not be subjected to inheritance tax.
How can you get tax-free life insurance?
Completing a trust form is essential to ensure that your life insurance policy is not subject to inheritance tax.
Having a trust ensures that the money from your life insurance policy goes to the people you want it to. The best way to do this is to place your policy into trust.
Once your policy is placed into trust, it will be kept outside of your estate, which can help mitigate inheritance tax.
Income tax and life insurance: What you need to know
We all know the feeling of looking at your payslip at the end of the month and seeing how much tax has vanished from your wage. But luckily, you don't need to worry about taxes when it comes to your life insurance.
Income tax is a type of tax you pay on your earnings. Generally, the payout from your life insurance policy will not be subject to income tax.
Setting up a trust with Caspian Insurance
Here at Caspian, we have a dedicated, in-house trust team who will be on hand to run through your forms, saving you time.
At Caspian, our approach to trust forms is to make the process as simple and seamless as possible. Our friendly experts can help guide you through the forms step by step.
Setting up a trust through Caspian is always free of charge. We can advise you on which type is best for you and sift through the legal jargon to ensure you are comfortable and understand what will happen to your life insurance payout in the event of your passing.
How are life insurance proceeds taxed?
The payout from most life insurance policies is tax-free, and the only tax you'll really need to consider is inheritance tax.
Life insurance proceeds can be taxed differently depending on the arrangements of the life insured. Different types of trusts are available, which may mean different taxation rules.
Is life insurance included in an estate?
A person's estate usually includes possessions like cars, jewellery, and their home. It also includes money, which is why the proceeds of a life insurance policy can be included in the estate unless the policy is placed in a trust. Sorting your trust forms ensures these proceeds are handled separately from your other assets.
By assigning a trustee, the people you choose as beneficiaries receive the money directly, bypassing potential inheritance taxes. This arrangement also facilitates quicker access to the funds since it avoids the probate process. The insurance payout may be considered part of your estate without such a trust, subject to the usual legal procedures.
Setting up your life insurance in a trust can significantly speed up this process, ensuring your loved ones get the money they need as quickly as possible.