Trust your Life Insurance

The subject of life insurance is a complicated one at best, and with Inheritance Tax to consider it makes things even more confusing. But should the thought of IHT put you off taking out a life insurance policy?

Essentially, a life insurance policy will pay out a pre-agreed sum on the event of the policy-holder's death. There are many different types of life assurance policies but the principal remains the same. The policy-holder pays a monthly premium which is decided based on the person's lifestyle and health at the time of the policy. Different insurance companies offer different rates so it's important to compare many different policies when planning your life insurance.

Life insurance is a useful thing to have if you have dependents or your death would mean financial hardship for anyone. The most common type of policy will pay out a fixed sum, usually equivalent to a year's salary, which can be used by any dependents to maintain a standard of living.

This is where many people get stung by taxes. When a person dies, their 'estate' – property, belongings, savings, investments etc – is subject to inheritance tax. A life insurance payout is also included in the taxable estate. Claiming a payout on an insurance policy can therefore cause unneeded stress for the bereaved, and they could often find the eventual payout far lower than they had bargained for.

Inheritance tax currently stands at 40% of all estate value over £312,000 (the current Nil Rate Band threshold). This means that anything over and above this amount will have 40% deducted for the taxman. For example, an estate worth £400,000 is £88,000 over the NRB. IHT will be charged at a rate of 40% on that £88,000, making the total tax due £35,200. Quite a substantial sum for a recently bereaved person to have to pay out. But there is a way to reduce this.

When writing up a life assurance, or term assurance policy, make it In Trust to your partner or whoever you want to receive the payout. Provided they have a financial connection with you – meaning they will suffer financially upon your death – the payout will not be regarded as part of your estate and will go directly to them. This will also cut out many of the legal delays with solicitors and result in your beneficiaries receiving the money faster.

By: J Tillotson

If your spouse will be using your life insurance payout to pay off a mortgage, putting the policy in trust will enable them to pay the lender directly. Cheap life insurance cover may not be subject to IHT. Compare life insurance policies online.

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