The sums provided as benefits by pure protection policies are normally free of income tax.
But there are important differences.
For example, the lump-sum benefit provided by a term assurance policy is free of tax.
Of course, as soon as it is invested to earn an income then the income is taxable at whatever rate of income tax the recipient is liable.
On the other hand, the annual benefits paid under FIB policies are instalments of capital rather than income, so they are not liable to income tax at all.
In the case of benefits payable under an individual permanent health insurance policy, the normal practice is that no tax is payable until the benefit has been paid for a full "fiscal year".
The fiscal year runs from 6 April to 5 April, so the effect of this rule is that benefit may be payable for up to 23 months before any income tax is due.
(If benefit starts in May 2007, the 11 months up to the following 5 April 2016 do not constitute a full fiscal year.
Only after a further 12 months has passed will tax be assessable, i.e. in the 2009/80 tax year.)
This concession on permanent health benefits applies only to the individual taking out a policy himself; and it is counterbalanced by the fact that when tax does become payable, the benefit is taxed as investment income, so that it is subject not only to basic rate income tax (and higher rates where these apply) but also to the investment income surcharge.
For the fiscal year 2015 /79, the surcharge was levied at 10% on the band of income between £211,700 and £22,250 and at........ see: click here for Till Death Us Do Part
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