How to use life insurance to cover a future Inheritance Tax bill for your family

Published: June 28, 2024 by Jennifer Armstrong

The amount the government collects through Inheritance Tax (IHT) is on the rise, and freezes to allowances mean it’s expected to increase further. If your family could face a bill when you pass away, life insurance could provide a valuable way to cover the expense.

According to MoneyAge, the amount collected through IHT hit a record £7.5 billion in 2023/24.

An IHT bill could not only mean passing on less wealth to your loved ones, but it may be stressful too. The portion of your estate that exceeds thresholds could be liable for IHT at a standard rate of 40%, and your family might need to consider which assets to sell to cover the expense. 

Understanding whether IHT may be due on your estate could help you make provisions that will ease the burden for your family.

If the value of your estate exceeds £325,000, it could be liable for Inheritance Tax

IHT is paid if the value of your estate exceeds thresholds when you pass away.

In 2024/25, the nil-rate band is £325,000 – if the value of all your assets is below this threshold, no IHT will be due. In addition, many estates can use the residence nil-rate band, which is £175,000 in 2024/25 if your main home is passed on to direct descendants.

So, you can often pass on up to £500,000 before you need to consider IHT. If you’re planning with your spouse or civil partner, you can also pass on unused allowances to them.

Importantly, the nil-rate band and residence nil-rate band are frozen until 2028, which is predicted to lead to more estates becoming liable for IHT.

Indeed, the Institute for Fiscal Studies estimates that by 2032/33, 1 in 8 people will have IHT due either on their death or that of their partner. As a result, IHT revenues are predicted to double over the next decade. 

Life insurance can provide a useful way to pay Inheritance Tax

Life insurance won’t reduce how much IHT your estate is liable for. However, it could provide a straightforward way for your loved ones to pay the bill.

When you take out whole of life insurance, you’ll need to pay regular premiums to maintain the cover. When you pass away, a lump sum will be paid to your beneficiaries, which they can then use to pay IHT. It could mean your family doesn’t need to break up your estate or sell assets to settle the bill.

The cost of the premiums will depend on a variety of factors, including your age, health, and lifestyle. In addition, the level of cover you require will also affect the cost.

You can select the level of cover that suits your needs, so understanding the size of a potential IHT bill is important.

A good place to start is by assessing the value of your estate now. Your estate covers all your assets, from property and investments to material items.

You’ll then want to consider how the value of each asset could change during your lifetime. For example, the value of your property will likely rise.

If you’re not using savings and investments to supplement your retirement income, they could also increase in value over the long term. On the other hand, there may be assets you’ll deplete during your lifetime, such as your pension.

As a result, the potential size of an IHT bill could be difficult to calculate. A financial planner could help you get to grips with how the value of your estate might change in different scenarios so you can choose the right level of life insurance for you.  

You may want to place life insurance in a trust if it’s for Inheritance Tax purposes

If you’re considering using life insurance to provide your family with a way to pay a potential IHT bill, it’s sensible to place the life insurance in trust.

Using a trust means it sits outside of your estate and won’t be included when calculating how much IHT is due. If you didn’t take this step, the lump sum that the life insurance pays out might be included in your estate, which would lead to a larger IHT bill.

You can set up a trust yourself but they can be complex and there are several different types. Seeking the services of a legal professional could minimise the chance of mistakes occurring and ensure the trust you set up suits your purposes.

Get in touch to talk about your estate plan

Life insurance could provide your loved ones with a simple way to pay an IHT bill, but there may be other steps you can take as well. As part of an estate plan a financial planner would review your circumstances and goals to understand how you could pass on assets effectively, including steps that may reduce an IHT bill.

Please contact us to arrange a meeting to talk about your estate.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.


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