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        Updated: April 17, 2024

        Tax on Whole of Life Insurance

        Want to know the tax implications for Whole of Life insurance? Read our guide to find out everything you need to know.

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in whole of life insurance. Ask us a question and we'll get the best expert to help.

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        If you take out whole-of-life insurance to financially cover your loved ones in the event of your passing, you’re probably wondering how tax affects the overall amount they could get.

        One of the main selling points for whole-of-life insurance is the potential inheritance tax benefits. But how does this work, and which policy would provide you with the best protection?

        To answer these questions and more, we’ve put together this article.

        The experts we work with are able to provide you with all the necessary information about whole life insurance tax. Call us on 0808 189 0463 or make an enquiry and we’ll match you with an expert for a free, no-obligation chat.

        Is whole of life insurance taxable?

        Whole-of-life insurance is not subject to capital gains tax or income tax, though your beneficiaries may have to pay inheritance tax, which is 40% on all your assets worth over £325,000 (at the time of writing). However, there is a way to reduce or avoid paying inheritance tax altogether, which we explain below.

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        The tax advantages of whole-of-life insurance

        If your overall assets are worth more than £325,000, you would typically be subject to inheritance tax of 40%, and the tax would need to be paid before your beneficiaries had access to the estate. If no protection was in place and your beneficiaries could not afford to pay the tax bill outright (as they cannot use the money in your estate for this purpose), a loan may have to be taken out – potentially leaving them even financially worse off.

        However, a whole-of-life insurance plan written in trust could save your beneficiaries thousands by making the sum assured the subject of a trust.

        The sum assured (which is agreed at the outset and remains the same throughout your policy) will ensure that your beneficiaries can be paid a lump sum outside of your estate in order to pay the tax charges. A whole life cover written in trust also avoids probate, allowing your beneficiaries to gain access to their inheritance quicker.

        Are there tax implications of cashing out whole life insurance?

        Yes, though it depends on your policy type and exactly how you want to cash out your funds, as there are three options available for most whole-of-life policies: borrowing, withdrawing, and surrendering.

        There are also two different ‘portions’ which make up a life policy, which you need to be aware of if you want to cash out your whole-of-life insurance.

        These are:

        • Death benefit: This is the set amount your beneficiaries will get once you pass away. In some circumstances, you could even get this benefit if you are diagnosed with a terminal illness.
        • Cash value: This is the part you could potentially take out. It builds over time, as insurance companies will use your higher premiums to invest in and provide you with some of the returns. Therefore it’s better to cash out after many years instead of a few to allow the value to grow, though many policies will not allow you to cash out until you have a certain amount available.

        You could take the cash value if you wish to transfer it to a term life insurance plan, though for the best advice on how to manage your policy, speak with an expert.

        See the sections below for more information about borrowing, withdrawing or surrendering on the policy:

        If you need funds in a hurry, you could borrow on your policy. This could be a good option if you do not want to pay back a loan – instead, your insurance provider may reduce your death benefit in accordance with the outstanding balance of your loan. However, you will be charged interest on the loan, so if you wish to keep a healthy death benefit for your beneficiaries to use after your passing, you may wish to pay it off.

        If you want to withdraw your funds, you will not be charged tax on the amount you put in. However, any gains on your original funds will be subject to tax. Each policy will take a different stance on this, so it’s best to check with your provider or have an insurance expert find deals that are more flexible.

        If you want to stop paying your whole-of-life insurance’s premiums, you could choose to surrender on your policy. You can withdraw the cash value (which will be taxed according to gains), though you will also be giving up the death benefit. This could be the case if you wish to transfer to a cheaper term life insurance, or no longer want a policy – though bear in mind that your beneficiaries will have to pay the tax before they can access their inheritance.

        Is whole life insurance tax deductible?

        In short, the answer is no. This is because taking out life insurance is a personal choice – it’s not compulsory and therefore the government doesn’t make whole life insurance premiums tax deductible.

        Is whole life insurance tax-free?

        You may be wondering if your whole life insurance proceeds are taxable. Your whole life insurance payout isn’t guaranteed as tax free, but it can enable significant tax advantages. For example, if it’s written under trust, your beneficiaries can receive the payment as a tax free lump sum. Speak to an insurance expert to find out how to take full advantage of whole life insurance tax benefits.

        Whole of life cover for inheritance tax planning

        Inheritance tax (IHT) planning is a major reason people take out whole of life cover. With some of the advantages of using trusts for IHT having recently been removed, whole of life insurance remains one of the best tools for getting the most out of your inheritance.

        If your whole life insurance is protected by a trust, the lump sum paid out when you die will go straight to your beneficiaries – free of any tax deductions. This sum can then be used to help pay off your inheritance tax bill.

        IHT planning is a complex area; to find out how to maximise your savings and pass on your wealth to the next generation, contact us and we’ll put you through to an expert whole life insurance advisor.

        Speak to an expert about whole life insurance taxation

        To find out more about how tax could affect your whole-of-life cover it’s best to speak to an expert who can provide guidance on your situation so you can be sure you make the best decision. Give us a call on 0808 189 0463 or make an enquiry. We’ll then match you with an expert who has the right experience for your circumstances. We don’t charge a fee and there’s absolutely no obligation to make a purchase.

        Ask a quick question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in whole of life insurance. Ask us a question and we'll get the best expert to help.

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        Pete Mugleston

        Pete Mugleston

        Mortgage Expert, MD

        About the author

        Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

        Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

        FCA Disclaimer

        *Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us as well as any of our own are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

        Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.