If I make a claim on my critical illness insurance will I get taxed on the payout?

We are effectively covering ourselves against the worst case scenario of being diagnosed with a critical illness and covering ourselves in a financial way. Although this type of insurance does not prevent you from actually developing a critical illness it can certainly help provide a source of money when things are already at a difficult stage. Critical illnesses can happen at any given point and in most cases at the worst time possible.

There are arguments as to whether or not critical illness insurance is worth having. It is all dependant upon a few circumstances such as the individual who is applying for the covers circumstances, the provider they choose, the amount they are insuring for amongst others. It must be said that with anything what suits one person will not suit another. It is entirely up to the individual and how they feel about having cover or not having cover. First of all the provider you decide upon covering your critical illness insurance for must be a reputable firm. They should be registered with the appropriate governing bodies so that the consumer can see that they are legitimate. With regards to the amount of cover that the applicant goes for is entirely dependant upon their situation at the time of application. Obviously over the years the circumstances of the person insured will change, however the insurance can be adapted and also changed to fit around them. At the start of taking out a critical illness insurance policy they will need know the reasons behind taking this sort of cover out and weigh up exactly how much cover they are in need of.

If in the unfortunate event that you are diagnosed with a critical illness and it is confirmed by a trained medical practitioner that is currently working and need to submit a claim on your policy you can rest assured that the benefits if agreed to be paid out by the company are generally paid out on a tax free basis. Obviously the individual must meet all of the criteria requested by the insurance provider such as the survival period and the definition of their critical illness as stipulated in their terms and conditions. This means that the monies on the critical illness insurance plan will be paid out in full and can be used however is felt necessary. It could be to adapt your residency to enable you to be comfy at home with your illness, clear debts, pay for medical treatment and others. It can be paid to the policy holder or the beneficiaries as stipulated in any trust agreement that has been put into force. Generally the payments are made in the form of a cheque.

When it comes to life insurance the payouts on this type of policy can be slightly different. If you were to have a claim from a life insurance policy and the payment took your estate over the limits set by the government then this would be taxed at 40% under inheritance tax rules.

If a couple are married then there is no tax liability on either life if a critical illness or life insurance policy was claimed on, however if a single person had a life insurance policy and they died and the beneficiaries were their siblings then some or all of the benefit may be subject to Inheritance Tax. If that was the case then it may be advisable to seek advice regarding the possibility of putting the insurance policy in trust. Currently the inheritance tax amount for 2011/2012 for life insurance etc is for:

·Under £325,000 - Nil*

·Over £325,000 - 40%*

* Information sourced from the United Kingdoms government budget and correct as of the 3rd of august 2011.

We all think it will never be us but if we are unfortunate enough to actually be diagnosed with a critical illness at least we have a form of cover in force such as this or a life insurance quote.