Life insurance products are used either:
- to pay out a sum of money to a beneficiary when someone dies, or
- as an investment vehicle to provide a return on an investment in much the same way as other savings-type products (for example, an endowment policy attached to a mortgage)
The tax treatment of these insurance policies depends on whether they are considered to be qualifying or non-qualifying.
In general terms, where the policy is non-qualifying there is anti-avoidance legislation in place to charge any profit made on encashment to income tax rather than capital gains tax. This is different from the normal rules whereby profits on most investment products (eg shares, unit trusts, etc) are chargeable to capital gains tax. To confuse matters, although the profit is charged to income tax rather than capital gains tax it is normally referred to as a 'life insurance gain' or a 'chargeable event gain'.