I am a US/UK dual citizen living in the UK. I am married to a UK citizen who does not pay US taxes.

We are buying a property in the UK, and the mortgage lender has sold us "Mortgage Insurance", which pays out a lump sum in the event of one spouse's death, in the amount of the remaining unpaid mortgage. The beneficiary is a UK trust we have set up for the sole purpose of receiving this lump sum and applying it to the mortgage debt.

Additionally, we bought a similar policy that pays out upon permanent disability of either spouse (instead of death).

The lump sum is paid out tax-free in the UK; the theory is that PAYE tax has already been paid on the monthly premiums.

So for the avoidance of doubt let me review the four payout scenarios, all of which result in a lump sum payout for the remaining value of the mortgage:

  • I die;
  • I become disabled;
  • Spouse dies;
  • Spouse becomes disabled.

The agent has advised me to check whether any of these four potential lump sum payments would be subject to US tax.

In the worst case, when I die the lump sum would be "income" for me on the year I died, and US tax would have to be paid on the amount (it is potentially 10X what I earn in a typical year).

I would like to know how other UK borrowers subject to US tax have approached this problem. Thanks.

  • Update: Although the accepted answer provides interesting information, the issuer of the insurance would not guarantee my spouse would receive any of the money without an international probate process. I expatriated, in order to absolutely solve the life insurance question. Aug 13, 2015 at 4:12

1 Answer 1


Generally, life insurance proceeds are not taxable in the US - assuming the premiums were paid with after-tax money.

However, the premiums themselves may be subject to a excise tax the US imposes on its citizens who buy foreign insurance policies. As with any other kind of investment, the US penalize you for not using US-based insurance providers. You can read more about it here (IRS Publication 510), and talk to your US tax adviser.

  • Stackoverflow is my US tax advisor. Jun 14, 2015 at 12:04
  • As I understand it from Publication 525, Life insurance payouts received by the US beneficiary are generally tax free if the insured dies. But the situation of permanent disablement is not clearly covered. Jun 14, 2015 at 12:13
  • @DouglasHeld disability insurance follows the premiums. if the premiums are after tax - the proceeds are also.
    – littleadv
    Jun 14, 2015 at 19:05
  • Thank you @littleadv ! Could you please cite any reference for that? Jun 15, 2015 at 11:20
  • @DouglasHeld not really, don't have it at hand right now and don't have the time to look for it. But its a common situation, a lot of people in the US have disability insurances from their employers.
    – littleadv
    Jun 15, 2015 at 15:06

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