Life Insurance for Inheritance Tax

Q: Can you take out life insurance to cover inheritance tax?

Yes, you could take out life insurance to help cover inheritance tax (IHT). Using life insurance to pay towards the tax bill on your estate is one way to ensure that your family have less to worry about after you’re gone. When planning to minimise or avoid IHT liability in the future, most people set up a whole of life policy that’s written in trust . Whole of life insurance lasts for the rest of your life and pays out a lump sum when you pass away. Writing the policy into trust is a quick and easy process that helps protect the pay out from inheritance tax charges.

Q: Is life insurance subject to inheritance tax?

A life insurance pay out itself isn’t usually subject to inheritance tax; however, it could be subject to IHT if it’s not written in trust. If your policy is not in trust, then the lump sum pay out will be counted as part of your estate after you’re gone. If your estate, including a life insurance pay out, is valued over your tax-free threshold, then the pay out may be affected by IHT. However, when taking out life insurance for inheritance tax planning, you have the benefit of arranging your policy in trust. Setting up a trust is a simple process that allows you to legally separate your life insurance from your estate. This means that the pay out could help to cover a potential tax bill rather than increasing how much tax you need to pay.

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Life insurance for inheritance tax

Can you take out life insurance to cover inheritance tax?
What is life insurance?
What is inheritance tax?
Why look at whole of life insurance for inheritance tax?
How can I use life insurance to cover potential inheritance tax on my estate?
Benefits of writing life insurance in trust
Is life insurance subject to inheritance tax?
How much does life insurance for inheritance tax cost?
Can you take out over 50s life insurance for inheritance tax?
How to arrange life insurance for inheritance tax
Life insurance and inheritance tax FAQS

Life insurance for inheritance tax [how it works: key points]

Life insurance written in trust could be used to help cover an inheritance tax bill
The most suited life insurance for inheritance tax planning is usually a whole of life policy (lifelong cover)
It’s important to write your policy in trust to help avoid or minimise inheritance tax on the pay out
A trust is a legal arrangement that allows you to transfer your life insurance to a trustee, who will then manage the policy on behalf of your beneficiaries
Reassured offer whole of life insurance options through our advised team, as well as a free online trust service. If you’d like to place your policy in trust, simply ask one of our experts to find you a suitable policy that has the trust option available
For more detailed information on IHT and its effects, you will need to contact a financial advisor or solicitor

Can you take out life insurance to cover inheritance tax?

Yes, you could take out life insurance to help cover inheritance tax (IHT).

Using life insurance to pay towards the tax bill on your estate is one way to ensure that your family have less to worry about after you’re gone.

When planning to minimise or avoid IHT liability in the future, most people set up a whole of life policy that’s written in trust.

Whole of life insurance lasts for the rest of your life and pays out a lump sum when you pass away.

Writing the policy into trust is a quick and easy process that helps protect the pay out from inheritance tax charges.

Continue reading our guide for more information on how you can set up life insurance specifically to cover inheritance tax and the benefits of writing your policy in trust.

Or get in touch to speak to one of our dedicated experts.

Life Insurance for Inheritance Tax » Get Quotes

What is life insurance?

Life insurance is a type of policy that’s designed to pay out a cash lump sum to your loved ones after you’re gone, either to help minimise the financial impact of your passing or to provide them with an inheritance in the future.

There are different types of life insurance available, each suiting different needs and budgets. These include:

Whole of life insurance
Term life insurance
Over 50s life insurance.

What is inheritance tax?

Inheritance tax (IHT) is the tax on your estate when you pass away.

An estate includes all your assets such as:

Property
Possessions
Savings
Life insurance

IHT thresholds vary depending on your personal circumstances, but the standard tax-free threshold in the UK is £325,000.

The tax rate is normally 40%, which is charged on the part of your estate that’s above the threshold^[1].

HMRC reported that around 30,000 estates (almost 5% of all deaths in the UK) paid inheritance tax in 2022-23^[2]. This number is growing due to increasing house prices and changes to IHT rules planned for the future.

Why look at whole of life insurance for inheritance tax?

Whole of life insurance is often considered when looking at estate planning and inheritance tax.

This is because it’s a type of policy that lasts for the rest of your life and pays out when you pass away - unlike a term-based policy that only pays out if you pass away during a set term.

Whole of life insurance written in trust could help towards an IHT bill that’s due on your estate or as an additional inheritance for loved ones to spend as they wish.

Whole of life insurance for inheritance tax key features:

Provides lifelong cover
Pays out a fixed lump sum when you pass away (as long as you keep paying your premiums)
Can be written in trust
Available to applicants aged 18 – 84
Fixed monthly premiums (starting from just £8 a month) through Reassured^±

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How can I use life insurance to cover potential inheritance tax on my estate?

Here is how you can use life insurance to cover potential inheritance tax on your estate, step by step:

Take out whole of life insurance. This policy is often used for inheritance tax purposes as the cover lasts for life (as long as you pay your premiums). Our advised team could help you arrange a suitable whole of life policy by comparing quotes and talking through the options we have available

Put your life insurance in trust. Setting up a trust is an important step to ensure that the pay out is kept separate from your estate after you’re gone. There are different types of trust, however, Reassured offer discretionary trusts through our online service

Choose trustees and beneficiaries. The process involves placing someone you trust (a trustee) as the new owner of your policy and choosing the people you wish to benefit from the pay out (your beneficiaries)

Pay out goes to beneficiaries. As the policy is no longer legally yours, after a claim the pay out will go directly to the trust and then distributed to your beneficiaries in line with your wishes

Avoid/minimise inheritance tax. The money could then be used towards the potential inheritance tax bill on your estate when payment is required, or for other purposes.

Benefits of writing life insurance in trust

There are several key benefits of writing life insurance in trust:

Avoid or minimise 40% inheritance tax

When your policy is written in trust, your loved ones may not have to pay inheritance tax on the lump sum pay out as its not counted as part of your estate. As explained previously, the money can be used to pay all or some of the inheritance tax bill on your estate.

Avoid the probate process (faster pay out)

Probate is the process of administering your estate after you pass away. Depending on how complicated your estate is, this process can sometimes take many weeks or months if your policy is not in trust - delaying a life insurance pay out to loved ones.

However, when a policy is written in trust, the pay out could go directly to the trust and avoid probate. Meaning your loved ones could receive a faster pay out.

Decide who gets the pay out and when

When writing your policy in trust, you can specify your beneficiaries and potential future beneficiaries (such as unborn grandchildren), which can offer peace of mind that the money will go to the right people.

Furthermore, you can specify how much of the pay out each beneficiary should receive and when they should receive it, by completing an ‘Expression of Wishes’ form alongside the trust form. For example, you may want the trust to hold your grandchildren’s share of the funds until they turn 18.

If you choose to take out your life insurance through Reassured, we’ll provide all the information you need about writing your policy in trust.

However, as it’s a legal arrangement that cannot be easily undone, you may wish to get legal advice before deciding if this is the right option for you.

Contact Reassured for your free life insurance for inheritance tax quotes and to learn more about our fee-free trust writing service.

Is life insurance subject to inheritance tax?

A life insurance pay out itself isn’t usually subject to inheritance tax; however, it could be subject to IHT if it’s not written in trust.

If your policy is not in trust, then the lump sum pay out will be counted as part of your estate after you’re gone.

If your estate, including a life insurance pay out, is valued over your tax-free threshold, then the pay out may be affected by IHT.

However, when taking out life insurance for inheritance tax planning, you have the benefit of arranging your policy in trust.

Setting up a trust is a simple process that allows you to legally separate your life insurance from your estate.

This means that the pay out could help to cover a potential tax bill rather than increasing how much tax you need to pay.

How much does life insurance for inheritance tax cost?

The cost of life insurance depends on a range of factors, including information about yourself and how much cover you take out.

During the application you’ll be asked about your:

Age
Health
BMI
Smoking status
Family medical history
Lifestyle
Occupation.

Insurers will consider these factors to calculate the cost of your monthly premium based on your level of risk.

The table below shows example premiums for whole of life insurance.

These quotes are based on a non-smoking applicant in good health taking out £50,000 and £70,000 of cover:

Age	Monthly premium for £50,000 of cover	Monthly premium for £70,000 of cover
20	£30.68	£40.57
30	£35.33	£46.96
40	£47.28	£63.36
50	£58.18	£78.33
60	£82.72	£112.01
70	£140.83	£191.80

The cost of life insurance varies between different insurers, so it’s important to compare quotes before buying.

Whole of life insurance starts from just £8 a month through our advised service. Secure our best deal today.

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Can you take out over 50s life insurance for inheritance tax?

Yes, over 50s life insurance could be taken out to help cover inheritance tax.

Many people take out over 50s life insurance to provide a small inheritance for loved ones, so writing the policy in trust could be beneficial.

Over 50s life insurance key features:

Guarantees acceptance to UK residents aged 50 – 85
Offers up to £20,000 of cover (depending on your age, smoking status and budget)
No medical questions

Reassured can help compare over 50s life insurance from some of the best UK insurers (prices from £5 a month⁺).

However, not all policies can be written into a trust, so if looking for a policy to write in trust for IHT purposes, it’s important to check first if this option is available with your chosen policy before buying.

How to arrange life insurance for inheritance tax [Get Quotes]

If you’re looking for life insurance to help cover inheritance tax, and want to secure a good deal, then get in touch with Reassured.

Compare whole of life insurance through our advised team or compare other types of life insurance using our award-winning comparison service
Our dedicated team can also help you choose a policy that can be written in trust (to avoid or minimise 40% IHT) if this is the right option for you
Writing your life insurance in trust through Reassured is very simple and completely free. If your policy has the trust option, we’ll automatically send you a link to our online trust form
It takes just 2 minutes to complete the form and there’s no signing or printing necessary.

Contact Reassured for your free, no obligation life insurance quotes and save money today.

Secure Life Insurance in Trust » Avoid or Minimise IHT

Life insurance and inheritance tax FAQS

Is life insurance taxable?

Life insurance isn’t subject to income tax or capital gains tax.

However, it could be subject to inheritance tax if the value of your estate exceeds the tax-free threshold, and your policy is not written in trust.

Is life insurance part of an estate?

Yes, the pay out from a life insurance policy is usually considered part of an estate – unless the policy is written in trust.

How can I avoid inheritance tax on life insurance for my beneficiaries?

You may be able to avoid inheritance tax on life insurance if it’s placed into trust.

This is because the pay out may not be considered part of your estate when your tax liability is calculated, depending on your own personal circumstances.

With less tax to pay on your life insurance, your beneficiaries could receive a larger inheritance.

Are whole of life policies exempt from inheritance tax?

No, whole of life policies are not exempt from inheritance tax if the policy takes your estate above the tax-free threshold, but you could write your life insurance in trust to avoid IHT on the pay out.

What is the inheritance tax on life insurance?

Life insurance that’s not tax exempt would be charged at the standard IHT rate of 40%.

What if my inheritance tax liability changes?

With some policies, you may have the added benefit of being able to increase or decrease your sum assured during the policy term if your inheritance tax liability changes.

It may be possible to change your whole of life insurance sum assured if the following events occur:

The value of your estate increases (increasing your tax liability)
There’s a change to IHT legislation in the UK (such as a change in tax rate or exemptions).

Not all policies offer this and there is no guarantee a trust can be changed. You should seek independent legal or financial advice if this concerns you