If you have taken out a life insurance policy you do not really want it to pay out. This is the irony of these type of products. They can be very expensive, in some cases running into hundreds of pounds. In the world of corporate insurance (film stars and footballers) the monthly or yearly premium can run into thousands if not tens of thousands of pounds. But what happens when they do pay out? In most cases the policy will pay out a large lump sum, the average in my opinion would equate to £ 100,000.
A large pot of money to come into your estate, in most cases, will be allocated to pay off the mortgage. It should be noted just because the policy was taken out to pay of the mortgage – this does not mean you are obliged to use the lump sum for this purpose. When the lump sum payment is made, do you pay income tax? The short answer is no. There is no income tax due by the individual who has passed away or on their estate.
If the life insurance has been placed in a trust and left to a specific individual, again the receipt of the lump sum in no way affects the income tax position of the individual whom receives the bequest.
In real terms, there are no tax implications for the life policy benefits. It is always a preferred method to place the life insurance into a trust – these are called 'will trusts' they are the simplest type of trust offered free by the life insurance company. You simply nominate a beneficiary (s) who will benefit form the policy on your death. The other option is to allocate the policy in your will.