Critical illness insurance tax implications

As one of the most popular health insurance products, we receive a number of enquiries every week relating to critical illness cover.

This type of insurance pays out in the event of you being diagnosed with a specific medical condition listed in your policy, and is designed to help you and / or your family financially while you focus on recovery.

But what are the tax implications of critical illness insurance?

Many customers reach out to us asking for clarification on whether their critical illness cover is tax free, and in what instances it may be tax deductible.

We’ve prepared this short guide covering all you need to know about critical illness cover and tax, to help put your mind at ease.

Are critical illness insurance premiums tax deductible?

In many instances, no, the money you receive from a critical illness insurance payout is not taxable if you’re diagnosed with a defined critical illness during your private policy term.

Provided you’ve kept up with your premiums, you should be covered throughout the period and therefore receive a tax-free payout.

However there are a few exceptions which we will be covering later on.

Can you claim critical illness insurance on your taxes?

When you receive the funds from a critical illness insurance claim, the money you’re paid is not classified as income because the money has not been earnt, and is therefore not taxable.

The proceeds are designed to provide you with a lump sum benefit under a specified period after diagnosis of a predetermined life-altering illness or medical condition (at least up to the amount of coverage you have with the policy).

When do you pay tax on critical illness insurance payouts?

That being said, there are a number of circumstances in which your critical illness illness is tax deductible:

Cash surrender value

The cash surrender value is how much money an insurer pays to a policyholder in the event of a policy being voluntarily terminated before its maturity, or an insured event occurs.

If the cash surrender value is greater than the premiums you’ve paid, the difference will be taxable.

How this impacts you is very much determined by what type of policy you hold and what premiums you’re paying.

Contact us to speak to an insurance specialist for expert advice bespoke for your situation.

Inheritance tax

If you take out a joint life insurance and critical illness policy and make a claim but do not receive the funds before passing away, your loved ones may face an inheritance tax bill if the payout forms part of your estate.

If your estate is valued at £325,000 or more, inheritance tax will be charged on the insurance payout in this scenario.

There are ways to prevent this from happening, such as writing your insurance policy “in trust”. This refers to when your policy is held within a trust, and therefore is technically classed as being “outside of your estate”.

To ensure your loved ones don’t face an inheritance tax bill if the unmentionable happens, make an enquiry and we’ll refer you to a health insurance specialist.

Corporation tax: Critical illness cover benefit in kind

Benefits in kind are “perks” which some employees receive from their employment which are not part of their salary cheque or wages, and include things like private medical insurance.

If your critical illness cover is a benefit in kind, tax will be due on any payout you receive. Your employer can seek corporation tax relief on the cost of paying your premium, and any benefit you receive will be taxed via PAYE.

If you share the cost of your critical illness insurance with your employer things are slightly more complicated. If, for example, your employer pays 50% of the premium and you pay the remaining 50%, in the event of a payout you will pay tax on half of the money you receive.

Corporation critical illness insurance: pre tax or post tax?

Many employers offer group insurance plans, often including private medical insurance, to employees at reduced rates.

Most of these plans tend to be set-up as pre-tax deductions. If you opt for coverage under your employer’s plan, your premium is likely to be deducted from your gross pay before tax is calculated.

This reduces your gross taxable wages and the tax withheld from your pay, which will mean you will pay less tax. The money net pay in your paycheck is the amount available for post-tax insurance.

Some employers offer supplemental insurance plans and add-ons to your health insurance, that you can purchase after tax, which will be tax-exempt in the event of a critical illness diagnosis.

Speak to an expert about critical illness insurance tax implications

If you’re considering taking out critical illness cover, or already have a policy in place and want a thorough understanding of any tax implications, contact us for expert, up to date advice.

The insurance experts we work with will discuss your individual circumstances with you, and explain exactly what you can expect in terms of tax deductions given your situation.

Give us a call on 0808 189 0463 or submit an online enquiry. We only work with 5* accredited advisors, we don’t charge a fee, and there is absolutely no obligation on your part.