Tax and qualifying life insurance products

If you’ve used up your ISA allowance and you’re looking for other tax-efficient savings and investment options, life insurance is something you should look into. There are policy options that do more than just pay out when you die. You can use them as tax-efficient places to store and grow your money.

Life insurance as an investment

Some life insurance products are designed to be an investment, as well as a form of protection.

These are called endowments or investment plans (if you pay regular premiums) or investment bonds or single premium bonds (if you pay in one or more lump sums).

Tax on life insurance investments

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The tax treatment of a life policy is determined by whether it is a qualifying policy or a non-qualifying policy. If in doubt talk to an independent financial adviser.

All types of life insurance have complex tax rules, but if you’re using one as an investment the most important question to ask is whether yours is a qualifying policy.

What is a qualifying life insurance policy?

The qualifying rules vary slightly according to the type of policy and are quite complex.

Further information on qualifying policy conditions can be found on the HMRC website.

The tax advantages of a qualifying policy

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Product providers must provide you with ‘key facts’ information that you can understand, covering: what the investment is and how it works, the key risks, charges and when you’ll have the right to access the Financial Ombudsman service and the Financial Services Compensation Scheme.

Generally speaking, any gain on a qualifying policy is not taxable. A gain on a non-qualifying policy could be subject to higher and additional rates of Income Tax.

The calculation of any gain is based on the surrender or maturity value of the policy. So qualifying status is relevant for policies that can acquire a surrender or maturity value.

The use of qualifying status was primarily to take advantage of the tax benefits of the qualifying policy rules. But the introduction of the £3,600 premium limit for qualifying policies, effective from 6 April 2013, saw most providers withdraw them from the market.

Fees and costs

Like most investment packages, life insurance policy investments come with management fees, investment fees and other costs. If fees and charges are too high they can outweigh any tax advantages, so always check what these are and shop around before you invest.

Non-qualifying life insurance policies

Non-qualifying life insurance policies can also have tax advantages.

In each year before the policy matures you can withdraw up to 5% of the amount you invested without triggering an immediate tax liability. This permits interim tax-free enjoyment of any growth in the value of the policy. This is because any Income Tax due only arises as and when the policy matures or is surrendered.

Tax on such withdrawals is only paid at the end of the policy.