Families considering how to pass on their wealth may also need to think about how a potential inheritance tax bill would be funded. While careful estate planning can help families make effective use of available allowances, exemptions and gifting opportunities, there may still be an inheritance tax liability when someone dies.
This is where life insurance for inheritance tax planning can play an important role.
At Jones & Co, we believe inheritance planning should look at the whole picture rather than focusing on one product or tax rule in isolation. Life insurance does not normally reduce the value of an inheritance tax liability by itself. Instead, an appropriately structured policy may provide money that beneficiaries or executors can use towards the tax bill, helping to reduce the need to sell investments, property or other family assets at an inconvenient time.
This guide explains the role that life insurance for inheritance tax planning may play within a wider estate plan, the different types of policies that could be considered, how affordability matters and why the way a policy is arranged can be just as important as the amount of cover selected.
Understanding the Potential Inheritance Tax Problem
Inheritance Tax, commonly referred to as IHT, can become payable when the value of a person’s estate exceeds the allowances and exemptions available to them.
For the 2026/27 tax year, the standard inheritance tax nil-rate band is £325,000. An additional residence nil-rate band of up to £175,000 may also be available where a qualifying home is passed to direct descendants and the relevant conditions are satisfied.
The residence nil-rate band can be reduced for estates worth more than £2 million.
Inheritance Tax is generally charged at 40% on the taxable portion of an estate, although different rules and rates can apply in certain circumstances.
For married couples and civil partners, unused allowances can potentially be transferred to the surviving spouse or civil partner. This means the eventual position can be considerably different from simply applying one person’s allowance to the total value of the family’s assets.
Estate planning therefore requires individual calculations rather than assumptions.
Why Can Inheritance Tax Create a Cash-Flow Problem?
A family may appear wealthy on paper without having large amounts of readily available cash.
For example, an estate could contain:
- a family home;
- investment properties;
- shares and investment portfolios;
- business interests;
- pensions or retirement assets where relevant;
- savings;
- valuable possessions; and
- other investments.
If a substantial proportion of that wealth is tied up in property or other assets, beneficiaries may face a difficult question: where will the money needed to meet an inheritance tax liability come from?
Selling an asset is one possible solution, but it may not always be desirable.
A family might want to retain a property, continue operating a business or avoid selling investments during unfavourable market conditions.
This is one reason families investigate life insurance for inheritance tax planning.
A suitable policy could potentially create a cash sum when it is most needed.
How Does Life Insurance for Inheritance Tax Planning Work?
The basic idea is relatively straightforward.
An individual or couple takes out life insurance designed to provide an agreed benefit following death, subject to the policy’s terms and conditions.
The amount of cover may be based on an estimated future inheritance tax liability.
For example, if professional estate planning calculations suggest that an estate could eventually face a significant tax liability, the family might consider whether insurance could provide some or all of the cash required.
However, effective life insurance for inheritance tax planning involves much more than choosing a large enough sum assured.
Questions should also be considered about:
- who should own the policy;
- who should receive the proceeds;
- whether a trust may be appropriate;
- whether cover should be individual or joint;
- when the policy should pay;
- how long cover needs to continue;
- how premiums might change;
- whether premiums remain affordable later in life; and
- how regularly the arrangement should be reviewed.
At Jones & Co, these wider considerations are an important part of helping clients explore suitable solutions for different types of inheritance tax planning needs.
Whole-of-Life Insurance and Inheritance Tax Planning
Whole-of-life insurance is commonly considered where a potential liability is expected to arise whenever the insured person eventually dies.
Unlike a conventional term insurance policy, which normally covers a fixed period, qualifying whole-of-life policies are designed to continue for life provided the required premiums continue to be paid and the policy conditions are met.
This feature can make whole-of-life cover relevant to inheritance tax planning because nobody knows exactly when an inheritance tax liability will arise.
However, there are important considerations.
Whole-of-life premiums can be significantly higher than premiums for shorter-term insurance. Premium structures also vary between insurers and products.
Before taking out cover, families should understand whether premiums are:
- guaranteed;
- reviewable;
- capable of increasing;
- dependent on investment performance; or
- subject to other policy conditions.
What appears affordable at age 55 may feel very different at age 75 or 85.
Affordability should therefore be assessed over the long term.
What About Term Life Insurance?
Term insurance provides cover for a specified period.
It may potentially be useful where an inheritance tax exposure is expected to exist temporarily.
One example could involve substantial lifetime gifts.
Certain lifetime gifts can remain relevant for inheritance tax purposes for a period after they are made. The precise tax treatment depends on the nature of the gift, the recipient, other transfers and individual circumstances.
A family could therefore discuss whether temporary cover has a role while a particular estate-planning exposure remains.
Term insurance is often less expensive initially than permanent cover, but it does not solve every inheritance tax planning problem. If the policy ends before the insured person dies, there may be no death benefit.
This is why life insurance for inheritance tax planning should be matched to the nature and duration of the underlying potential liability.
Joint-Life Second-Death Cover
For married couples and civil partners, inheritance tax frequently becomes particularly relevant following the second death because transfers between spouses or civil partners can benefit from important exemptions, subject to the applicable rules.
This may lead advisers to consider a joint-life policy that pays after the second insured person dies rather than after the first death.
Such arrangements can sometimes align the insurance benefit more closely with the point at which an inheritance tax liability is expected to arise.
It will not be appropriate in every case, however, and the family’s estate structure and objectives should be reviewed before selecting a policy.
Why the Way Life Insurance Is Arranged Matters
Buying the right amount of insurance is only one part of the process.
How the policy is owned and how the benefits will be paid can have significant implications.
Life insurance policies can, where suitable, be placed into trust. HMRC guidance recognises that life policies can be assigned or placed in trust, although the tax treatment depends upon the particular trust and the rights created under it.
A trust may potentially enable policy proceeds to pass to nominated beneficiaries or trustees rather than simply becoming an asset of the insured person’s estate.
That distinction can be particularly important where the purpose of the policy is to provide money towards an inheritance tax liability.
Trust arrangements are not automatically appropriate, and different types of trusts can have different legal and taxation consequences.
Once assets or policy rights have been placed into certain trusts, it may also be difficult or impossible to reverse the arrangement.
For this reason, people considering a trust should take appropriate professional legal, tax and financial advice before proceeding.
A Policy Should Not Be Considered in Isolation
At Jones & Co, we consider life insurance for inheritance tax planning as one potential component of a broader estate-planning conversation.
Insurance may sit alongside strategies involving:
- wills;
- lifetime gifting;
- annual gifting exemptions;
- trusts;
- business succession planning;
- investment planning;
- pension and retirement planning;
- charitable giving; and
- reviewing the ownership of family assets.
The objective should not simply be to purchase insurance.
The objective is to understand the estate, estimate the potential liability, determine what financial resources may already be available and then establish whether insurance could efficiently fill any funding gap.
Estimating How Much Cover Might Be Needed
One of the most important questions is how much insurance to arrange.
Simply calculating inheritance tax based on today’s estate value may not be enough.
A useful review may consider:
- the current value of the estate;
- expected future asset growth;
- mortgages and other liabilities;
- available inheritance tax allowances;
- the potential residence nil-rate band;
- lifetime gifts;
- assets passing to spouses or civil partners;
- relevant business or agricultural assets;
- existing life insurance;
- available cash and investments; and
- anticipated changes to the estate.
Future tax legislation cannot be predicted with certainty either.
This means that a policy selected today should normally be reviewed periodically rather than being regarded as a once-and-for-all solution.
Why Regular Reviews Are Essential
Families change. Assets change. Tax legislation changes. Insurance needs change.
A policy that was appropriate ten years ago might no longer match the estate it was intended to protect.
For example, the family’s property portfolio may have increased substantially in value. Investments may have grown. Assets may have been gifted to children. A spouse may have died. A business may have been sold. The policy itself may also have become more expensive following a scheduled review.
At Jones & Co, we believe that reviewing life insurance for inheritance tax planning is an essential part of responsible long-term planning.
A review can consider whether:
- the level of cover remains appropriate;
- the policy is still affordable;
- beneficiaries remain correct;
- trustees should be changed;
- estate values have changed;
- existing wills remain suitable;
- family circumstances have changed; and
- changes in tax legislation affect the original strategy.
Affordability Matters More Than Simply Obtaining the Largest Policy
It can be tempting to focus entirely on obtaining enough cover to match a projected inheritance tax bill.
But insurance only provides long-term protection if premiums remain sustainable.
Age, health, smoking status, medical history, policy structure and the amount of insurance required can all affect cost.
Someone buying cover later in life may face substantially higher premiums than someone arranging it earlier.
That does not automatically mean insurance is unsuitable. It does mean the likely benefit should be considered alongside the cost and available alternatives.
In some cases, partially insuring an expected liability while maintaining other liquid assets may be more practical than trying to insure the entire amount.
Important Questions to Ask Before Choosing a Policy
Before arranging life insurance for inheritance tax planning, consider discussing the following questions with a qualified adviser:
- What inheritance tax liability could my estate realistically face?
- Which allowances and exemptions are likely to apply?
- How might my estate change over the next 10, 20 or 30 years?
- Should the policy cover the entire estimated liability or only part of it?
- Would term insurance or whole-of-life insurance better match the risk?
- Should a couple consider individual policies or joint-life cover?
- Are premiums guaranteed or reviewable?
- Could premiums become unaffordable later?
- Should the policy be placed into trust?
- Who would act as trustees?
- Who should ultimately receive the policy proceeds?
- How quickly could beneficiaries or trustees access the money?
- How often should the policy and estate plan be reviewed?
- What happens if tax legislation changes?
These questions can help families move beyond simply comparing insurance quotations and towards making a more informed decision.
Jones & Co Can Help You Explore Your Options
There is no universal policy that suits every estate.
A homeowner wishing to leave property to children may have very different requirements from a business owner, landlord, investor or family with substantial inherited wealth.
That is why Jones & Co focuses on helping clients explore solutions suited to different types of life insurance for inheritance tax planning requirements rather than treating every family in the same way.
The starting point should be understanding your assets, family circumstances, objectives and potential inheritance tax exposure.
From there, you can consider the type and amount of insurance that may be appropriate, how affordable the cover is likely to remain and how it should fit alongside your wider estate-planning arrangements.
Take the Next Step With Jones & Co
Inheritance tax planning can involve important financial, legal and tax decisions, and it is generally better to consider these issues before an inheritance tax liability becomes an immediate problem.
If you are concerned about how your family could fund a future inheritance tax bill, Jones & Co can help you explore the role life insurance may play within your wider estate plan.
We can help you identify the questions that need answering, understand the different forms of cover available and consider how insurance may fit alongside your broader arrangements.
Contact Jones & Co today to start a conversation about life insurance for inheritance tax planning and the options that may be appropriate for your circumstances.
