Tax on life insurance policies

 

Provided the policy is a ’qualifying policy’, the benefits paid on death or maturity are not subject to income tax or capital gain tax. However, if the benefit payments push the value of the estate over the CGT non-paying threshold, the excess value will be subject to CGT.

The rules which govern qualification are:

• The premiums must be payable for ten years or 75% of the term whichever is the shorter. For example a ten year endowment plan will qualify after seven and a half years.

• The premiums must be paid regularly on an annual or more frequent basis such as monthly.

• The sum assured must be at least 75% of the total premiums payable over the life of the policy.

Your sales person, adviser or insurer will tell you whether or not your policy is a qualifying one. Although income tax is not normally payable on benefits from qualifying policies, liabilities may exist if the policy is cashed in early (within ten years or within 75% of the policy term) or if it becomes a paid up policy.

The proceeds of non-qualifying life policies are liable to higher rate income tax. In this case, income tax is payable on the chargeable gain (which is the amount of the policy proceeds less total premiums paid).