Reservation of Policy Benefits
Is it extremely important that you (assuming you are the policy owner as well as the insured person) do not reserve any policy benefits for yourself.
This includes not reserving any 'critical illness' or 'terminal Illness' benefits the policy may have.
Terminal illness benefit should not be confused with critical illness benefit,
Terminal illness benefit is simply an advance payment of the death benefit, as it triggers payment of the sum assured if the insured person is diagnosed as having less than 12 months to live.
Unless ALL policy benefits are given up, HM Revenue and Customs are likely to set aside the trust, and to include the policy proceeds in the estate of the deceased person when calculating the Inheritance Tax liability.
However, from a practical point of view, it does not matter that the insured person gives up any critical or terminal illness benefits.
In the event of a claim for either of these benefits, the insured person’s spouse can be paid the benefits and so for example, if the policy was designed to pay off a mortgage in the event of death or critical illness and assuming the insured person has a critical illness, their spouse can receive the funds and thereby pay off the mortgage.
