When taking out a life insurance policy, it is relatively easy to word it so that any payout will escape inheritance tax (IHT) – but with joint policies this can be more difficult, meaning the tax break may not apply.
This will usually be the case either when the couple concerned are joint tenants-in-common or joint beneficial owners, meaning that when the policy pays out, it becomes part of the deceased’s estate, and therefore liable to IHT. On the other hand, for policies where each has a contractual right to the full value of the property from the moment the other dies, there is no value in the policy until one of them dies, and therefore IHT cannot be charged.
In reality, many people will not be aware of which category their life insurance falls into and would not be in a position to determine the precise wording anyway. A simpler alternative may be for both partners to consider taking out single life insurance policies rather than a joint one.
Single policies are unlikely to be significantly more expensive and are easier to put ‘in trust’, for the benefit of the other policyholder, or other beneficiaries, such as the couple’s children. This option would also allow the couple to select different levels of cover, if appropriate, which may also help to keep costs down.