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Life insurance Tax guide 2024 – is life insurance tax deductible?

Life insurance pays out a lump sum if you die during the term of the policy which can be £100,000s for your family. It’s understandable to wonder whether there are specific life insurance tax rules that you need to consider.

A very common question that people often ask our experts, is life insurance tax deductible? This is a great question and certainly something that you should be made aware of when you’re buying life insurance.

There are several potential life insurance tax implications that you might need to think about, but it’s generally a lot more simple than you might think. The general rule is that ‘Life insurance is not taxed’ and this is both on the premiums that you pay and any pay out that your family receives.

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60-Second Summary – Life insurance Tax guide 2024

In this guide, our team of insurance experts will answer all of your common questions about life insurance tax and let you know what you might need to think about. Obviously, there are many different tax rules and these rules often change which means that it’s difficult to give life insurance tax advice for everyone.

  • Life insurance is not taxable as a general rule of thumb, but there are several potential tax implications to think about (e.g. Inheritance Tax).
  • Premiums that you pay every month for your life insurance policy are not taxable (e.g. Insurance Premium Tax), unlike other general insurance policies.
  • Business life insurance (e.g. relevant life insurance) is the most tax efficient form of life cover and can reduce premiums by as much as 49%.
  • Life insurance tax rules can change and so you should make sure that keep checking for the latest updates and guidance.

Life insurance pays out a lump sum to your family if you die during the term of your policy to protect them against financial loss. There are several types of life insurance available, so you should consider your options and choose the policy that feels best for you.

Benefits from life insurance are not restricted and can be used to pay for a wide range of purposes, including:

Most life insurance policies are taken out by parents with dependent children to make sure that they’re financially protected if you die.

There are two main types of life cover to consider when we talk about whether life insurance being tax deductible, which are business and personal life cover. Business life insurance is the only type of policy that is tax deductible because it is classed as an allowable business expense.

A man and woman sat together while the man uses a calculator. The caption reads 'Life Insurance Tax guide for 2024 UK. Our experts answer your main Tax questions in our latest independent guide to Life Insurance Inheritance Tax'

Is business life insurance tax deductible?

There are several different types of business life insurance policies which are designed to protect the business and others are to protect the individuals. The most common types of business life cover are considered to be an ‘allowable expense’ under HMRC guidelines and therefore these are tax deductible.

Relevant life insurance tax treatment

A relevant life insurance policy is a policy that is paid for by the company and it is specifically designed to be a benefit to employees and directors to protect their families if they die. Relevant life insurance is a fairly new type of business life insurance and it is now the most tax-efficient product that you can get.

Relevant life insurance is suggested to save up to 49% against the cost of traditional life insurance that is paid personally by an individual.

Key person life insurance tax treatment

The other tax-efficient type of business life insurance is key person life insurance (previously Keyman life insurance). This type of policy is designed to pay out to a business or company to help replace the cost of any ‘Key’ employee within the business. The benefit of a Key person life insurance policy is paid out to the company to pay for:

Key person life insurance is paid for by the business and is also classed as an ‘allowable expense’ for the company.

  • Corporation Tax relief
  • No other tax to be paid on the premiums
  • Benefits are paid out to the company and should not be taxable

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There is one exception that usually applies to the HMRC rules for tax relief on business life insurance premiums, which is sole traders. Business life insurance for sole traders is not tax deductible as it is not classed as an essential expense for running your business.

The only exception to this is potentially where a sole trader has employees and might therefore be able to claim tax relief on their business life insurance premiums. You would need to check with your accountant or tax advisor to confirm whether this rule would apply to your situation.

Personal life insurance is not tax deductible and therefore you would not be able to claim any tax relief on this type of policy. Effectively you don’t pay tax on the premiums that you pay for life insurance and your family will not have to pay tax on the benefit or pay out (unless there is an Inheritance Tax liability and the policy is not written in Trust).

This therefore means that you cannot claim any tax back on the life insurance premiums that you pay and you should not pay tax on any claims paid.

Life insurance premiums do not sit within the current income tax regime in the United Kingdom and Insurance Premium Tax (IPT) does not apply. This means that your life insurance premiums are paid out without any tax to be paid, which also means that you cannot claim tax relief on life insurance premiums.

Financial services in the UK (including life insurance) is not taxable and therefore you are not required to pay tax on these products, including:

Some general insurance policies attract Insurance Premium Tax (IPT) which is currently a Standard Rate 12% or Higher Rate 20%. These policies include:

Note: When you pay your life insurance premiums personally then you would also have already paid tax on the money that you use to pay your premiums (e.g. Income Tax and National Insurance).

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Life insurance is not taxable and therefore you won’t pay any tax on the premiums you pay or on the claims that are paid out. There are however some other potential tax implications with life insurance that you might need to consider.

When you take out life insurance there are the premiums that you pay which are not taxed and the payout you or your family receives.

Tax TypeDoes this tax apply to Life Insurance and how does it work?
Income Tax or Dividend TaxIf you’re Employed or Self-employed then you will be taxed at source on your earnings.
Your salary or dividends will be taxed which means that you will already have paid income tax before you pay any life insurance premiums.
National Insurance (NI)  As with income tax, you will pay National Insurance (NI) on your income and any life insurance premiums will be Net of NI contributions.
Inheritance Tax (IHT)Inheritance Tax (IHT) can be payable at the relevant rate that applies at the time of claims being paid (see latest rules).
You can mitigate any IHT liability by placing your life insurance policy in to Trust.
Capital Gains Tax (CGT)Capital Gains Tax (CGT) does not apply to life insurance premiums or any benefit that is paid out to your family from claims.
Corporation Tax (CT)Corporation Tax (CT) relief can apply to certain business life insurance policies (e.g. Relevant life insurance or Key Person life insurance).
You should speak to your accountant or tax advisor to get proper guidance or advice about the HMRC rules that apply to your business.
Value Added Tax (VAT)Life insurance is classed as exempt for VAT and so you will not pay this on the premiums or on any claims that are paid out by your insurer.
Insurance Premium Tax (IPT)Insurance Premium Tax (IPT) does not apply to life insurance and so premiums are calculated Net of any IPT rates.

The table above shows a quick guide to all of the potential tax rules that might apply to life insurance and how they work. Tax laws change every year and so these might be updated from time to time.

Life insurance payouts are paid out as a tax-free lump sum to your family, which is essentially the basic procedure. The exception to this is where a life insurance policy is not written in Trust and there is an Inheritance Tax (IHT) liability.

Financial journalist Martin Lewis recently published new guidance around this for 2024, including 5 ‘need to know’ rules for how Inheritance Tax works which is explained in the video below

Martin Lewis: Inheritance Tax will you pay it? A quick myth-buster to explain how it really works

If a life insurance policy is not written into Trust, it can form part of your estate and therefore can become part of your lifetime allowance (currently £325,000 per person in 23/34). This would mean the payout received from your insurance company could be subject to Inheritance Tax.You can avoid Inheritance Tax by writing your policy in Trust and therefore your payout will be paid directly to your family and cannot be classed as part of your estate.

It is very important to understand the rules about life insurance Inheritance Tax liability and some simple steps you can take to mitigate this. These rules will apply to:

  • Anyone with a ‘Personal Estate’ that exceeds the current threshold (see guidance)
  • Couples that have an ‘Estate’ that exceeds the combined threshold (see guidance)
  • Life insurance policies not written in Trust (see guide)
  • No cover in place to pay IHT liabilities (e.g. Whole of Life Insurance)

If your estate is deemed to be above the current IHT threshold (single or combined) then your family might pay Inheritance Tax on any payout that they receive, that is above your allowance.

You can mitigate your IHT liability which significantly reduces the risk of paying Tax on your life insurance claim by placing your policy in Trust. A life insurance Trust is usually Free and it ring fences the policy to fall outside of your estate which means that it should not attract Inheritance Tax.

Related guides

Guide to Life Insurance Trusts

Life Insurance Inheritance Tax Guide 2024

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Is it worth paying for life insurance?

Yes, if you’ve got children or financial dependents then you should have life insurance to protect them if you die. Martin Lewis and the Financial Conduct Authority recommend that you take out life insurance to protect your family and your home. Generally, life insurance premiums start from as little as £5 per month and will be cheaper for younger adults.

Common myths about life insurance:

  • Life insurance won’t pay out (pays out 98% of claims)
  • People with medical conditions can’t have life insurance
  • Life insurance is expensive
  • Savings can be just as effective as life insurance
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What is the average cost of life insurance per month?

Based on recent research carried out, the average cost of life insurance is approximately £38 per month and the average level of cover is £152,000. Life insurance premiums also vary dramatically from one insurance provider to another and you can reduce your monthly premiums by shopping around.

Fundamentally, life insurance premiums vary depending on your age, health and the amount of cover that you need, starting from as little as £5 per month. You can also get life insurance to protect your family and your home against financial loss if you die.

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What does life insurance cover you for?

Life insurance is a monthly renewable ‘term insurance’ contract that pays out a cash lump sum or regular payments on death to your family or beneficiaries. Policies are most commonly used for family protection or mortgage protection for your loved ones if you die and your household income reduces, plus the additional issues of losing a parent or carer.

Traditional life insurance will not exclude any pre-existing medical conditions and will cover suicide after 12 or 24 months. You can also use life insurance for business protection purposes as well as tax-efficient business life insurance for directors or key people.

What are the disadvantages of life insurance?

The biggest and most common problem that consumers have with life insurance is the cost and the monthly premiums. This is the top reason for policy cancellations and why more people don’t take out life insurance to protect their family.

Another key disadvantage with life insurance is that it holds no investment value, nor can you cash it in. Life insurance works like any other traditional general insurance policy (e.g. car insurance, house insurance, pet insurance etc.), you pay a monthly premium and it will pay out in the event of a claim. Some people decide to use savings instead of taking out life insurance but you need to make sure that you have sufficient savings to cover the costs of death for your family.

Why do I need life insurance?

The fact is that nobody actually ‘needs’ life insurance, but it is strongly recommended that families and couples have cover to protect their loved ones in the event of death. Martin Lewis recommends life insurance and says “this is something that every parent, partner, or person with any other type of dependent needs to consider”.

Life insurance financially protects your loved ones if you die and pays out a cash lump sum to repay your mortgage, pay for school fees, replace lost income, and pay for regular outgoings. Mortgage life insurance is not linked to your mortgage debt so you can use it to pay off some or all of your mortgage.

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