Terminal Illness, Power of Attorney, and Financial Planning: Acting Before It Is Too Late

A terminal illness diagnosis — defined in most UK life insurance policies as a condition where, in the insurer's opinion, the policyholder's life expectancy is 12 months or less — triggers one of the most important financial planning windows in a person's life. The decisions made in the period immediately following a terminal diagnosis can determine whether a family is financially secure for decades, or whether wealth is dissipated through unnecessary tax, delayed probate, or inadequate planning.

This guide addresses the intersection of terminal illness benefit provisions, powers of attorney, trust structures, and practical financial planning for individuals facing a terminal diagnosis or who wish to plan for this eventuality in advance. It is written in plain UK English for HNW professionals and their families and does not constitute legal, medical, or financial advice. Individual circumstances vary and professional advice from lawyers, financial advisers, and tax specialists is essential.

Terminal Illness Benefit: How It Works

Most UK whole-of-life and term assurance policies include a terminal illness benefit — an accelerated payment of the sum assured, made during the policyholder's lifetime when a terminal diagnosis is confirmed. The benefit is triggered when:

1. A registered medical practitioner certifies that the policyholder is suffering from a terminal illness
2. The insurer, based on that evidence, forms the view that life expectancy is 12 months or less
3. The policyholder makes a claim during their lifetime

On payment of the terminal illness benefit, the underlying life insurance policy typically terminates — the sum assured has been advanced, so the death benefit is extinguished (or reduced by the amount advanced, where only a partial payment is made).

Terminal illness vs critical illness. These are distinct benefits, commonly confused. Critical illness insurance pays a lump sum on diagnosis of a specified condition (such as cancer, heart attack, or stroke) regardless of life expectancy — the policyholder does not need to be terminally ill to claim. Terminal illness benefit is a provision within a life policy, triggered specifically by a prognosis of less than 12 months.

The practical difference is significant: CI cover pays much earlier in the illness trajectory — potentially years before any terminal prognosis — enabling the claimant to fund treatment, adapt their lifestyle, and plan while they are still relatively well. Terminal illness benefit addresses a later, more acute stage of planning.

Why Early Claim Is Important

If a policyholder qualifies for terminal illness benefit and does not claim promptly, the benefit may be lost. Specifically:

• If the policyholder dies before making a claim, the terminal illness benefit lapses and the standard death benefit (if the policy remains in force) is paid instead — but this may involve probate delays and the proceeds will form part of the estate
• If the terminal illness benefit claim is made but the insurer's process is slow, the policyholder may die before payment is received

The practical implication is that a terminal illness benefit claim should be made as promptly as possible following diagnosis, with medical evidence submitted immediately. Where the policyholder is already in an advanced condition, having a trusted family member, adviser, or attorney who can manage this process is essential.

The Role of Lasting Power of Attorney

A Lasting Power of Attorney (LPA) is a legal document that enables a named person (the "attorney") to make decisions on behalf of the person granting the power ("the donor") when that person lacks mental capacity. In England and Wales, there are two types of LPA:

Property and Financial Affairs LPA: Allows the attorney to manage bank accounts, investments, insurance policies, tax affairs, property, and other financial matters.

Health and Welfare LPA: Covers decisions about medical treatment, care arrangements, and personal welfare.

For the purposes of terminal illness financial planning, the Property and Financial Affairs LPA is the more immediately relevant. It allows the attorney to:

• Make insurance claims on the policyholder's behalf if they are no longer able to do so
• Manage investment portfolios and access bank accounts
• Deal with HMRC, pension trustees, and institutional administrators
• Execute financial decisions under guidance from advisers

The critical timing issue. An LPA can only be registered while the donor has mental capacity. Once capacity is lost — which can happen suddenly, particularly with conditions affecting the brain — it is too late to create an LPA. The alternative is a Deputyship Order through the Court of Protection, which is expensive, slow (typically six to twelve months), and subject to ongoing court oversight.

For anyone with a serious or progressive diagnosis — including early-stage dementia, Parkinson's disease, motor neurone disease, or certain cancers affecting the brain — registering an LPA without delay is an absolute priority. For HNW individuals with complex financial affairs, the absence of an LPA at a critical moment can be financially and practically catastrophic.

Trust Planning and Terminal Illness

Life insurance policies written in trust are an important part of estate planning for many HNW individuals. Trust placement offers:

• Probate bypass: Trust proceeds are paid to the trustees directly, without requiring a grant of probate. This means the trust can distribute funds to beneficiaries relatively quickly after a claim.
• IHT efficiency: Provided the trust satisfies relevant IHT conditions, life insurance proceeds held in trust can be outside the policyholder's estate for IHT purposes.
• Creditor protection: Trust assets are generally beyond the reach of personal creditors.

A terminal diagnosis is an important moment to review the trust structure. Questions that arise include:

Are the trustees appropriate? Named trustees may have died, changed circumstances, or become unsuitable. Where professional trustees are not in place, this is a good moment to add a professional trustee to ensure continuity of administration.

Are the beneficiaries current? Family circumstances change. The beneficiary nominations in a discretionary trust should be reviewed in light of the current family position — relationships, financial dependency, children's ages, and any tax considerations.

Is the trust registered with HMRC's Trust Registration Service? Trusts created after 6 October 2020 must generally be registered. Unregistered trusts may face penalties and claims processing delays.

Is the trust properly documented? Existing letters of wishes should be reviewed and updated. The letter of wishes guides trustees in exercising their discretion over distributions — it is not legally binding but is an important expression of intent.

Pension Planning Under Terminal Illness

Pension funds have historically sat outside the estate for IHT purposes and can be passed to nominated beneficiaries — including non-dependants — with income tax on drawdown applying depending on the type of pension benefit and the age at death. Note, however, that under the Finance Act 2026 most unused pension funds and death benefits will be brought within the estate for IHT from 6 April 2027, with personal representatives liable for the tax. This significantly changes the long-standing IHT efficiency of pensions and should be factored into any planning.

Under current HMRC rules (as of 2026 — rules are subject to change), death benefits from a defined contribution pension where the member dies before age 75 can generally be paid to nominated beneficiaries tax-free. Where death occurs after 75, benefits are taxed at the recipient's marginal income tax rate.

A terminal diagnosis — particularly one where death is expected before age 75 — may therefore make it optimal to preserve pension assets for intergenerational transfer rather than drawing them down first. Conversely, where immediate income is needed and the alternative is drawing on invested assets that would otherwise pass to the estate tax-efficiently, taking pension income first may be preferable.

These decisions are complex and depend entirely on individual circumstances. They should be addressed with a qualified financial planner and tax adviser without delay.

Lifetime Gifting and the Seven-Year Rule

Gifts made from capital during the donor's lifetime potentially escape IHT through the seven-year rule — if the donor survives seven years after making a gift, it falls outside the estate. A terminal illness diagnosis makes the seven-year rule irrelevant for most new gifts; the donor will not survive seven years.

However, several IHT exemptions are available regardless of survival period:

Annual exemption: Up to £3,000 per year (as of 2026 — subject to change) can be given without any IHT exposure.

Small gifts exemption: Gifts of up to £250 per person to any number of recipients.

Normal expenditure out of income: Regular gifts from surplus income — not capital — can be made IHT-free regardless of survival period, provided they meet HMRC's conditions (they are habitual, made from income rather than capital, and do not affect the donor's standard of living).

Business Property Relief (BPR) and Agricultural Property Relief (APR): Qualifying business and agricultural assets may attract relief from IHT regardless of the donor's lifespan. Note that from 6 April 2026 the 100% rate of relief is capped at £2.5 million per individual (transferable between spouses), with relief on qualifying value above that cap reduced to 50%; AIM and other unlisted shares qualify for 50% relief only and fall outside the £2.5 million allowance. For business owners, reviewing BPR qualification and the impact of the new cap is important as part of terminal illness planning.

Practical Steps Following a Terminal Diagnosis

For the policyholder and their advisers, a terminal illness diagnosis should trigger an immediate checklist:

1. Notify the life insurer and request terminal illness benefit claim forms
2. Instruct a solicitor to register LPAs if not already in place
3. Review and update trust documents and letters of wishes
4. Review pension nominations and the merits of drawdown vs preservation
5. Assess lifetime gifting opportunities under available IHT exemptions
6. Review business interests for BPR qualification and succession planning
7. Ensure all financial accounts, policies, and investments are documented centrally and accessible to the attorney and family

How Global Investments Can Help

Global Investments works with clients and their families on protection planning that anticipates the full lifecycle of potential claims — including the terminal illness planning window. We work alongside solicitors and tax advisers to ensure that insurance structures, trust arrangements, and financial plans are aligned and actionable.

Where a client has received a terminal diagnosis, we can assist with prioritising the financial and insurance actions required, coordinating with their legal and tax advisers, and ensuring that benefit claims are submitted correctly and promptly.

We also work with clients who are not yet facing a terminal diagnosis but wish to plan ahead — ensuring that LPAs are in place, trusts are properly administered, and the financial planning framework is robust enough to cope with any scenario.

Planning ahead is always preferable to planning under pressure. Please seek qualified legal, financial, and tax advice appropriate to your individual circumstances. This guide is for information only and does not constitute regulated advice of any kind.