Is life insurance considered part of an estate?
Life insurance policies can deliver considerable pay-outs to the survivors of the policyholder. It is natural to wonder whether that payment is part of the deceased person’s estate and thus subject to inheritance tax and the probate process. So, is it?
The answer is complicated. Sometimes, the life insurance policy is considered part of the legal estate. Any part of an estate above the £325,000 inheritance tax threshold will be subject to the 40% inheritance tax, including a life insurance pay-out.
The best way to avoid inheritance tax being levied on a life insurance pay-out is to put the policy in trust.
This means that the life insurance provider can become a trustee of the asset. Holding the legal title to it and, in the case of the policyholder’s death, must pay out the sum insured to the beneficiaries specified in the trust deed.
That means the pay-out is never considered in possession of the deceased and thus cannot be part of their estate or subject to inheritance tax. Instead, the money goes directly to the beneficiaries of the insurance policy.
Additionally, because the life insurance policy is not considered part of the estate, the beneficiary does not have to wait for the probate process to be complete to access it. Instead, the life insurance company can issue the pay-out immediately upon producing a death certificate.