Life insurance is another way of making someone a beneficiary while
you're still alive or if you die, whilst still taking account of the
portion of your estate legally set aside for your residuary legatees.
For instance, you may want to name your grandchildren as
beneficiaries. Because they're taxed separately at the rate for
direct-line relatives, they'll have less inheritance tax to pay in
total as the tax charge is spread over several heirs.
When the insured event occurs (you die or your insurance policy
matures), your insurance company pays a capital sum to the
beneficiaries named in your policy. You can technically surrender a
life insurance policy or change beneficiaries named under your policy
at any time, provided the insured event has not occurred.
A contractual beneficiary clause under a life insurance policy takes
precedence over what is stipulated in a marriage contract or will.
This is because the insurance pay-out goes straight to the
beneficiaries under the clause without passing into the deceased's
estate. You can avoid this happening by naming your estate as the
beneficiary, in which case the capital sum will be paid along with the
rest of the deceased policyholder's estate. Inheritance tax is payable
on such benefits.
Inheritance planning through life insurance can be done by means of
gauranteed-interest savings insurance (class 21) or unit-linked life
insurance (class 23).
Note that the policyholder2 should ideally also be the
insured person3 to avoid the insurance getting frozen where
the policyholder dies but the insured person is still living.