Is life insurance subject to probate?

Life insurance can provide vital financial security for loved ones after someone passes away. However, many people are unsure whether a life insurance payout is subject to probate and how it is treated as part of the estate. Understanding whether or not it is subject to Inheritance Tax and other taxes, as well as the situations where probate is required to claim life insurance, is crucial. Knowing the process can help families access funds more quickly at what is often a difficult time.

How to find out if someone has life insurance

It’s not always clear whether someone held a life insurance policy at the time of their death. If details weren’t shared during their lifetime, Executors or Administrators may need to investigate. Ways to check include:

• Searching personal paperwork: Look through bank statements, payslips, or correspondence that may reference premium payments or policy details.
• Contacting employers: Some workplaces provide group life insurance as an employee benefit.
• Checking with banks or Financial Advisers: The deceased’s bank or Financial Adviser may know if a policy exists.
• Using the Unclaimed Assets Register: This service can sometimes help track down forgotten or unclaimed policies.

If a policy is found, the insurance provider will require a death certificate and proof of authority (such as a Grant of Probate or Letters of Administration, if applicable) before releasing any information or funds.

Who can enquire about a life insurance policy?

After someone dies, only certain people are entitled to ask about their life insurance policy. Typically, this includes the Executor named in the Will or the Administrator dealing with the estate if there is no Will. Insurers may also release information to the named beneficiaries of the policy. In most cases, whilst anyone can enquire, the insurance provider will ask for a death certificate and details of the policy before they can share information.

Does life insurance form part of the estate?

In many cases, life insurance payouts do not form part of the deceased’s estate, and therefore, a Grant of Probate is not required to claim them. If the policy names a specific beneficiary, the funds are paid directly to them, bypassing probate entirely. This allows beneficiaries to receive the money more quickly, often before the estate is formally administered.

However, if no beneficiary is named or if the named beneficiary has already passed away, the payout may fall into the estate. In this scenario, a Grant will usually be required to access the funds.

Situations where a Grant of Probate may be needed

While life insurance payouts often bypass probate, there are circumstances where a Grant of Probate may be required before funds are released. These can include:

• No named beneficiary: If the policy does not specify a beneficiary, the payout will be treated as part of the estate and subject to probate.
• Beneficiary predeceases the policyholder: If the chosen beneficiary has already passed away and no alternative is named, the proceeds fall into the estate.
• Insurer requirements: Some insurance providers request a Grant of Probate as a safeguard before releasing large sums, even if a beneficiary is named.
• Complex or disputed estates: If the estate is being contested or there are multiple claims, probate may be required to establish legal authority.

In these scenarios, probate ensures the funds are distributed according to the law or the Will, protecting both the beneficiaries and the insurance provider.

Life insurance in a Trust

Placing a life insurance policy in a Trust is a common way to ensure that the payout avoids probate. When written in Trust, the policy is legally owned by the Trustees, who are responsible for distributing the funds to the named beneficiaries. This can help speed up access to money and provide greater control over how it is distributed. Trusts can also help reduce potential Inheritance Tax liabilities, depending on how they are structured. Life insurance as part of an employer’s pension plan is often written this way.

Is life insurance subject to Inheritance Tax?

Life insurance payouts are not automatically exempt from Inheritance Tax (IHT). If the payout is included in the estate, it will be counted when calculating IHT. However, if the policy is written in Trust, the proceeds usually fall outside the estate and are therefore not subject to IHT. This is one of the key reasons many people choose to write their life insurance policy in Trust.

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.

In conclusion

In most cases, life insurance payouts are not subject to probate, meaning beneficiaries can access the funds quickly and without the need for a Grant of Probate. However, there are exceptions, particularly when no beneficiary is named or the policy is not written in Trust. Writing a life insurance policy in Trust can help avoid delays and reduce potential tax liabilities.

At Kings Court Trust, we are experts in estate administration and can guide you through every stage of the process, including understanding how life insurance and other assets are handled after a loved one’s death.