Taxes and critical illness insurance: Will your benefits be taxed?
The good news is, no, the money you get from your critical illness insurance claim is not taxable, in the same way that the money your loved ones get from a life insurance claim is not taxable.
Is a critical illness claim taxable?
When you receive the money from your critical illness insurance claim, the funds you receive are not counted as income and are therefore not taxable. You did not earn anything. Rather, the proceeds from the critical illness claim is an attempt to put you back to your financial standing (at least up to the amount of coverage you have with the policy) before a covered event happened, in this case, a diagnosis of a critical illness.
- Top 5 reasons why a critical illness claim is denied
- Do critical illness insurers really pay out: what the statistics shows
- Top 10 critical illnesses that will pay out
- When are you suspected to get critically ill?
How you can use your tax-free critical illness benefit:
- Pay for treatment
- Take care of your family’s everyday needs
- Pay off the mortgage
The purpose of insurance is not profit, but compensation. You are simply being compensated for the money you lost because you were diagnosed with a critical illness. You will also suffer from a loss of income because you may no longer be able to continue with your employment.
This is one of the distinct advantages of getting a critical illness insurance policy. You are able to receive some funds to help you pay for your treatment without having to worry that this amount will be reduced by taxes.
When is money from critical illness insurance taxable?
Surrendering the policy (where the cash surrender value is greater than the premiums paid).
If the cash surrender value is greater compared to what you actually paid out, the difference is taxable.
Having a combined life and critical illness cover and the life insurance proceeds become part of your estate upon your death. (Learn more about this option by reading our article Is combined life and critical illness insurance a better deal?)
There may be instances that the insurance proceeds can become taxable if it should have been included in your estate before your death.
How a Combined Life and Critical Illness Cover May Impact Your Heir’s Tax Payments
The UK’s rates can reach a whopping 40%!
In the list above, we said that proceeds of a combined life and critical illness policy may be taxable. This is if the life insurance proceeds are paid to the estate, when there are no chosen trustees.
This can also happen when a person is qualified to make a critical illness claim (but doesn’t) or not fast enough so that he receives the claim while alive. Upon his death, the money goes to his estate – that means inheritance tax can be applicable and the heirs will have to pay this.
Consider Putting the Policy in Trust
To avoid having your heirs pay taxes on your life and critical illness policy, you can consider putting the policy in trust. The best thing to do is to get the advice of an experienced insurance broker or agent to see how you can put your policy in trust to protect it from inheritance taxes.
Last updated on: 18.1.2013
Recommended useful information to read:
- Dos and Don’ts when making critical illness insurance claims
- What you should know about your critical illness cover: the exclusions to your policy
- Things to consider before getting a critical illness insurance policy
- Are you at risk? Critical illnesses you may be susceptible to
- Save up on premiums: factors that affect your critical illness insurance premiums