IPTM7390 | Death events

Death is a chargeable event if it gives rise to benefits

The death of an individual who is insured under a life insurance policy is a chargeable event if it gives rise to benefits under the policy; otherwise it is not a chargeable event. Benefits may not arise for instance where a policy insures two or more individuals but only pays benefits on the final death – a ‘last to die’ policy.

Where a capital sum is paid on death under a life annuity contract made on or after 10 December 1974 that is also a chargeable event. By definition, no death events will arise on capital redemption policies.

Post-death appreciation or depreciation on a life policy

Except where the policy is a group life policy, a death paying benefits will bring the policy to an end. In computing the chargeable event gain on death, it is necessary to bring in the surrender value immediately before death – see IPTM7520. However, the insurer may not be informed of the death until some time later and in the meantime the value of the policy used in determining the final payment from the policy may have changed. This is likely to be the case with a unit-linked policy where the payment is based on the value of the units.

How any post-death appreciation or depreciation is treated for tax purposes depends on the terms of the contract. If the death benefit is defined by reference to the unit price at the date of notification of death to the insurer then any post-death appreciation or depreciation is disregarded for tax purposes. If the death benefit is defined by reference to the value on date of death then any additional payment is likely to be interest and must be treated as such, including deduction of basic rate tax where appropriate. In both cases, the amount to be taken for chargeable event purposes in computing and reporting the gain should follow the insurer’s practice in determining what the surrender benefits would be on the day of death. This will normally be the value of the units on the day of death or on the day before death.

In no circumstances can there be any kind of subsequent surrender chargeable event after a death bringing a policy to an end.

Group life policies

Unless a group life policy is an ‘excepted group life policy’ – see IPTM7020 to IPTM7050 – it will be within the chargeable event rules. Then, each death that gives rise to benefits under the policy will be a chargeable event. The normal chargeable event gain calculation rules will apply, as described in IPTM7545.