life insurance guide

The payout from a life assurance policy is generally free of deductions for personal income tax - by itself, it is tax-free. However, the payout is considered overall as part of the deceased's estate.

If the payout, when added to the estate, pushes the entire estate over the threshold for paying no inheritance tax, then any amount over the threshold would be liable for tax. In order to spare beneficiaries the burden of paying tax on a life insurance payout, policyholders can opt to write the policy in Trust. Placing the policy in trust ensures that the proceeds will not create or worsen a tax burden. They will also be available to the trustees to pay out to the beneficiaries almost immediately upon death, whereas if they form part of an estate they may be tied up in probate for several months.

A whole-of-life insurance policy can also be written under trust to be used for expected inheritance tax costs on the deceased's estate to cover the tax burden. The policy in trust can be released to the beneficiaries almost immediately upon death, and they can then use it to pay the inheritance tax bill to release the estate.

Placing a life assurance policy in Trust is a complex issue, and people considering this option should always seek advice from their solicitor and independent financial advisor before proceeding.