Life Insurance for Inheritance Tax

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

Yes, life insurance could be used to help cover inheritance tax (IHT). The pay out from a policy can provide funds to help meet tax liability on your estate, relieving this burden from your family after you’re gone. When planning to minimise or avoid inheritance tax, many people choose a whole of life policy written in trust . Whole of life insurance provides lifelong cover and pays out a lump sum to your beneficiaries when you pass away. Writing the policy in trust is an important but simple step. It helps to ensure the pay out itself is not subject to inheritance tax.

Q: 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 and any life insurance policies not placed in trust. Tax liabilities vary depending on personal circumstances. However, the standard tax-free threshold is £325,000 (or £500,000 if leaving your home to your children or grandchildren) [1] . The tax rate is 40% on the part of your estate above the threshold.

Q: Is life insurance subject to inheritance tax?

A life insurance pay out may be subject to inheritance tax if it’s not placed in trust and your estate is worth over the tax-free threshold. This is because, without a trust, life insurance is typically considered part of your estate when you pass away and therefore, included in IHT calculations. If the total value of your estate exceeds the tax-free allowance you’re entitled to, then the pay out from your policy may be subject to tax.

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Life insurance for inheritance tax

Can you take out life insurance to cover inheritance tax?
What is inheritance tax?
How to use life insurance to cover inheritance tax?
What are the benefits of trusts?
Why consider whole of life insurance for inheritance tax?
Is life insurance subject to inheritance tax?
How to avoid inheritance tax on life insurance?
How much does life insurance for inheritance tax cost?
How much life insurance is needed for inheritance tax?
Life insurance and inheritance tax FAQS

Life insurance for inheritance tax [quick summary]

Typically, whole of life insurance that's written in trust is used to help cover the cost of inheritance tax (IHT) on an estate
40% tax is charged over the threshold of £325,000 (although, tax-free thresholds vary based on your personal circumstances)
It’s important to place a policy in trust so that it’s not added to the value of your estate when you pass away (helping to avoid or minimise IHT)
Reassured offer a free online trust service for most of the polices we offer. It takes just 5 minutes to complete our trust form
Trusts are legal arrangements, so you may wish to speak to a financial advisor or solicitor before deciding if this is the right option or you.

Can you take out life insurance to cover inheritance tax?

Yes, life insurance could be used to help cover inheritance tax (IHT).

The pay out from a policy can provide funds to help meet tax liability on your estate, relieving this burden from your family after you’re gone.

When planning to minimise or avoid inheritance tax, many people choose a whole of life policy written in trust.

Whole of life insurance provides lifelong cover and pays out a lump sum to your beneficiaries when you pass away.

Writing the policy in trust is an important but simple step. It helps to ensure the pay out itself is not subject to inheritance tax.

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

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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 and any life insurance policies not placed in trust.

Tax liabilities vary depending on personal circumstances. However, the standard tax-free threshold is £325,000 (or £500,000 if leaving your home to your children or grandchildren)^[1].

The tax rate is 40% on the part of your estate above the threshold.

How to use life insurance to cover inheritance tax?

Here’s how you can use life insurance to help towards an inheritance tax bill on your estate:

Choose a life insurance policy. There are different types of life insurance to choose from, but the most common policy used for inheritance tax planning is whole of life insurance. A whole of life policy pays out a lump sum to your loved ones when you pass away (no matter when this happens).

Calculate your cover. Secure the right amount of cover to suit your specific circumstances and needs. This may involve adding up all your assets to calculate how much inheritance tax may be due on your estate (40% above the £325,000 tax-free threshold).

Put your policy in trust. This is an important step when arranging life insurance specifically to help pay inheritance tax. A trust is a legal arrangement that transfers ownership of your policy to a trustee and separates the value of your policy from your taxable estate. This ensures that the pay out itself is exempt from tax, helping to reduce the amount your loved ones may have to pay.

Choose trustees. You’ll need to choose trustees to manage the policy after you’re gone. If using life insurance for inheritance tax purposes, it may be sensible naming a legal professional as one of your trustees, as well as a family member or friend, to ensure that the funds are used as you intended.

See the HMRC: Trusts and taxes guide if you’d like to learn more about legal trusts and how they can be used to help avoid or minimise inheritance tax. Or speak to a financial advisor or solicitor if you require personalised advice.

What are the benefits of trusts?

A trust helps to separate your life insurance from your estate. This can have the following benefits:

Avoid or minimise 40% inheritance tax - provide a larger inheritance for loved ones

When life insurance is placed in a trust, the pay out isn’t usually added to the value of your estate for tax purposes. This helps protect the pay out from inheritance tax so that the full amount could be used to help pay the tax bill.

Avoid the probate process - faster pay out to help cover the tax bill

Probate is the process of administering your estate after you pass away. This process can take many months and needs to be completed before your beneficiaries can access any funds.

As inheritance tax needs to be paid within 6 months, having life insurance in trust can help ensure that your beneficiaries have the money they need to cover the bill before this time is up.

Better control over how the proceeds are spent – specify your wishes

Setting up a trust means that you choose people you trust (trustees) to distribute funds from your policy to your chosen beneficiaries so they can pay the inheritance tax as you intended.

Why consider whole of life insurance for inheritance tax?

Whole of life insurance is a policy that’s often considered when estate planning and looking to reduce the impact of inheritance tax.

It’s a type of policy that lasts for the rest of your life, unlike term life insurance which only lasts for a specific period.

The sum assured (pay out amount) could be matched with your tax liability, depending on your personal circumstances and budget.

Whole of life insurance key features:

Provides lifelong cover
Pays out a fixed lump sum when you pass away (as long as you keep paying your premiums)
Available to applicants aged 18 – 84
Application includes medical questions
Can be written in trust to help protect the pay out from IHT
Offers up to £1,000,000 of cover depending on your circumstances and budget
Fixed monthly premiums (starting from just £8 a month) through Reassured^±

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Is life insurance subject to inheritance tax?

A life insurance pay out may be subject to inheritance tax if it’s not placed in trust and your estate is worth over the tax-free threshold.

This is because, without a trust, life insurance is typically considered part of your estate when you pass away and therefore, included in IHT calculations.

If the total value of your estate exceeds the tax-free allowance you’re entitled to, then the pay out from your policy may be subject to tax.

How to avoid inheritance tax on life insurance?

It’s possible to avoid or minimise inheritance tax on life insurance by placing it in trust.

When life insurance is in trust, a full pay out can be made to your loved ones when you pass away.

The funds could be used to help cover inheritance tax instead of increasing the value of your estate (and amount of tax owed, if your estate is worth over the threshold).

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 the policy you choose.

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 policy type, cover amount and length of cover will also impact the cost.

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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How much life insurance is needed for inheritance tax?

You’ll need to work out the total value of your estate to understand how much inheritance tax may be due and the amount of life insurance needed to help cover this.

Your estate value includes all your assets (everything you own) added up.

Inheritance tax is charged at 40% on the part of your estate over the tax-free threshold. When you’ve done this calculation, you can estimate how much tax may be owed.

Here are some examples of how much life insurance may be needed based on different thresholds:

	Total estate value	Tax-free threshold	Taxable estate	Amount of life insurance you may need
Example 1	£600,000	£500,000	£100,000	£40,000
Example 2	£400,000	£325,000	£75,000	£30,000

Tax liability will vary based on your personal circumstances.

Compare quotes for life insurance

If you’re concerned about inheritance tax and looking for suitable life insurance to help cover this cost for your loved ones, then Reassured are here to help.

Compare whole of life insurance through our advised team or compare other types of life insurance using our award-winning comparison service to help you find our best deals
Our dedicated team can also help you choose a suitable 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 less than 5 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.

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Life insurance and inheritance tax FAQS

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.

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.

Is life insurance good for inheritance tax planning?

Life insurance could be a good idea for inheritance tax planning, depending on your personal circumstances.

A policy written in trust provides a legal way to help cover a tax bill if you’re worried about the impact this may have on your loved ones’ inheritance.

However, if you need more clarity on whether this is the best solution for you, it’s important to get advice from a legal professional.

Can you use over 50s life insurance for inheritance tax?

Yes, you could use over 50s life insurance to help cover inheritance tax.

This policy could be a good alternative to whole of life cover if you have a medical condition as there are no medical questions when you apply.

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)
12 – 24 month waiting period before full cover starts
Can be written in trust to help protect the pay out from IHT (selected policies)
No medical questions.

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

What is the best way to write life insurance in trust for inheritance tax?

Each insurer has their own trust process and forms to complete. Usually, it’s easiest to set up a trust through your chosen insurer.

At Reassured, we offer fee-free and simple online trust writing service for most of the policies we arrange. It takes just two minutes to complete our trust form and there’s no printing or signing required.

If you have any questions, our dedicated team are on hand to provide information. Contact us on: 0808 168 2025 between 09:00 - 17:00, Monday to Friday or email customer.services@reassured.co.uk.

Are whole of life policies exempt from inheritance tax?

No, typically whole of life policies are not exempt from inheritance tax if the policy is not written in trust and your estate is above the tax-free threshold.

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 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.