Life insurance: Is it subject to probate?

When a loved one dies and they have a life insurance or assurance policy, that policy may pay out a very significant sum. It’s only natural to question whether the payout forms part of their estate, which may be subject to probate, Inheritance Tax, and other taxes.

Does life insurance form part of the estate?

It depends on how the insurance policy was written, but life insurance payouts do not generally form part of the deceased’s estate and therefore a Grant of Probate is not required to claim them. Typically, they are made directly to the beneficiaries named in the policy and therefore never come into or out of the deceased’s estate. However, this does not mean that life insurance is not relevant to an estate and to the probate process.

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 a larger sum that will potentially be 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 partner 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 in a Trust

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. This also usually makes it exempt from any taxes (subject to HMRC approval). Life insurance as part of an employer’s pension plan is often written this way.

Is life insurance subject to Inheritance Tax?

As life insurance payouts are not usually part of a deceased person’s estate, they should be free from Inheritance Tax. However, beneficiaries of any payouts will need to consider how they impact their own tax affairs and the value of their own estate in the future.

Additionally, taxes such as Income Tax or Capital Gains Tax are also avoided, as these are also estate-related.

What happens to the payout if the named beneficiaries of a life insurance policy have died?

If the named beneficiaries have passed away, they may have left a Will outlining who should benefit. The life insurance policy will be paid out to these individuals. However, if they haven’t left a Will, the insurance company, as Trustees of the policy, have the right to ask their own questions and decide who should benefit. That could mean a payout to the deceased’s estate, but not necessarily.

How to find out if someone has life insurance

There may be circumstances that mean you’re not sure if someone held a life insurance policy. Initially, the best way to search for the policy is to check their back statements to see if the name of the insurance company is included. The insurer can then be contacted by the person administering the estate.

It could also be located by finding the original policy documentation; it’s sensible to keep an eye out for this whilst searching for the Will and other important documents. You could also contact their employer, as many companies provide death in service policies, which pay out a lump sum to a person of the employee’s choosing if they’re working for the company at the time of their death.

If these efforts are unsuccessful, an unclaimed assets tracing service should be able to help you locate the policy.

Who can enquire about the life insurance policy?

The Executor (if there is a Will) or Administrator (if there is no Will) will be responsible for finding information regarding the deceased’s life insurance policy. Whilst anyone can make an enquiry, a copy of the death certificate will need to be provided before payouts can be claimed; therefore, the Executor/Administrator will need to provide this document.

These questions may help you to understand what you are dealing with and how to move forward:

• How is the policy held? If it is written under Trust, confirm the Trustee details and provide a copy of the Trust Deed and/or relevant documents.
• Are the policy proceeds payable to the estate or to a Discretionary Trust or third party?
• If the proceeds are due to the estate, what is the total amount payable?
• Can you provide the relevant chargeable events gains certificates for the period from the preceding 6 April to the date of death and for the prior tax year?

In summary, dealing with life insurance as part of the estate can be complicated. Policies can be written and held in a variety of ways that will determine what happens to the payout, and it is important to contact the insurer to understand the details of the policy in question.

Additionally, if you are unsure how to proceed with talking to insurers, life insurance can be paid out as part of the estate administration process. Therefore, if you choose to instruct a professional provider on your behalf, they can deal with the process of searching for the policy and contacting the insurer.

Kings Court Trust is an award-winning probate and estate administration provider who can take care of the practicalities after death, taking the stress and liability off your hands. If you have any questions about probate or estate administration, call our experienced Client Services Team on 0300 303 9000.

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