Whether or not a policy forms part of an estate depends on how the insurance policy was written. Typically, life insurance payouts are not part of the deceased’s estate as they are made directly to beneficiaries named in the policy, therefore, they never come into or out of the deceased’s estate. However, that does not mean that life insurance is not relevant to the estate and probate.
In many cases, homeowners have life insurance policies in place to cover the value of their mortgage in case they die before it is repaid. In fact, many mortgage lenders require life insurance as a condition of lending. So, while they may not be part of an estate, life insurance policies are relevant because they can affect how much debt the estate carries. If a policy has been set up to repay the mortgage, then the value of the remaining mortgage debt may be cleared by the policy, leaving a larger estate to be distributed to the beneficiaries – and also a larger sum liable to Inheritance Tax.
Many couples elect to take out life insurance that covers the value of the mortgage for each person so that, should one die, the other is not left with the burden of meeting the mortgage payments on their own. If there is a surplus after the policyholder has died, that would normally pass to the estate, unless the policy was written in Trust and the Trustees have an option to direct the funds to other beneficiaries without going through the estate.
Life insurance can be written into a Trust so that when it pays out, either as a lump sum or as regular income, it does so from the Trust and not the estate, and is therefore normally exempt from any taxes, subject to HMRC approval. Life insurance as part of an employer’s pension plan is often written this way.
Get in touch if you have questions about life insurance and probate.
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Hastings & Rother Legal Services Ltd offer a diverse range of legal services including will writing, power of attorney, funeral plans, estate administration and more. To speak with us or if you have any...
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