Quick guide to life insurance and tax
You’re probably wondering what tax has got to do with life insurance and in most cases, the two don’t tend to overlap too much. However, when the two worlds collide, it’s important to be clued up on the top questions asked about tax and life insurance.
Inheritance tax
Inheritance tax is arguably the most mentioned tax you’ll see when it comes to life insurance.
The most common reason for getting any sort of financial protection is to ensure your loved ones would have a lump sum of money if the worst were to happen to you. So it’s only natural to wonder whether or not this amount of money would be taxed.
What about income tax?
We all hate looking at our payslip and seeing how much tax has disappeared off our wage every month but you don’t need to worry about tax when it comes to a pay-out from your life insurance policy.
Income tax is a tax you pay on your earnings. Generally, the pay-out from your life insurance policy will not be subject to income tax.
Is life insurance tax deductible?
There are some forms of life insurance that are tax deductible but generally they are policies set up by businesses for their Directors or employees. The premiums for some of these policies can be treated as a business expense.
However, with the majority of life insurance policies, the premiums and pay-out are both generally tax-free.
What if your employer pays for your life insurance?
If you have life insurance paid for by your employer (generally referred to as ‘death in service’), you generally won’t have to pay tax as it is not generally classed as a benefit in kind.
A benefit in kind is something that your employer provides for you as a benefit to your role such as a company car or mobile phone as you have to pay tax on these benefits with death in service policies you normally don't have to pay tax.
How to get tax-free life insurance
To help ensure your life insurance policy is not subject to inheritance tax, completing a trust form is essential. The function of a trust form is to ensure that all of the money ends up where you want it to go, the best way to do this is to place your policy in trust.
The way this works is, once your life insurance is placed in trust, it will then be kept outside your estate and as a result can mitigate inheritance tax. To find out more about trusts and what it means for your life insurance policy, click the button below.
What are the benefits of a trust form?
Mitigating inheritance tax isn’t the only benefit of putting your policy into trust, you can also help to avoid probate.
In simple terms, probate is a process that determines what happens to someone's property, possessions and money after they have passed away. The process of probate can be lengthy.
Getting your hands on a trust form
In order to complete your trust forms, you’ll need a life insurance policy. If you’ve already got a life insurance policy, then you will have been sent your trust forms when you initially took out your cover. If you have misplaced your trust forms, need a recent version of them sent to you or if you’re having trouble completing your forms then our trust team will be more than happy to help you.
Our in-house trust team is on hand to help you, whether it’s a random question that you have about your forms or if you need a few phone calls to run through everything - we’re here to help!
How can we help?
At Caspian, we can help you find the cover that works for you and at the most affordable price too. We search through the UK’s leading life insurance providers to find the best policy to financially protect your loved ones. Click the button below to get started with your life insurance policy today!