Life Insurance Qualifying Rules

Published / Last Updated on 17/05/2021

Life Insurance Qualifying Rules

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Qualifying rules are rules set out by the HM Revenue and Customs that will allow certain types of life insurance investment plans to pay out benefits either on death or surrender tax free.

If a life insurance investment policy is classed as a qualifying policy for tax reasons it has to fit within certain rules but, if the rules are adhered to, the proceeds of the policy will be completely tax free.  The insurance company will still pay taxes on the fund whilst the policy is in force.

Qualifying policies:

For a life insurance investment policy to be qualifying it must meet the following rules:

  • A policy must be for a term of at least 10 years
  • Premiums must be at least annual and paid for 10 years or until death.
  • Life assurance equivalent to 75% of the total premiums paid must be included.

For life insurance protection policies such as whole of life, endowments or term assurance, the rules may be slightly different.

Maximum Investment Plans (MIP) or Qualifying Savings Plans (QSP)

  • Maximum investment plans and other qualifying savings plans are tax free for all investors after 10 years for all policies.  However as higher and additional rate tax payers were making huge investments in these savings plans, the Government have introduced premium restrictions:
  • Tax Year 2013-14 - Maximum contributions limit £3,600 pa for all plans started after 21 March 2012.

Non - Qualifying policies:

  • If the policy does not meet the qualifying rules, for example an insurance bond or a MIP started after 21 March 2012 with high contributions, or if it was a qualifying policy but it is surrendered within 10 years or three quarters of the term (whichever is less) then it becomes non-qualifying.
  • Income tax could be payable because surrender or partial surrender is a chargeable event.  Tax is only payable on the gain made.

Non taxpayers and basic rate taxpayers normally will have no tax to pay. 

Higher rate tax payers will have a tax liability to pay, top slicing rules determine whether or not tax is payable.

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Life Insurance Qualifying Rules

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