Life cover doesn’t reduce the size of your estate, and it doesn’t replace good tax planning. But it can provide something incredibly valuable for your family; money, paid quickly, at exactly the moment they need it.
1. What Role Does Life Cover Play in IHT Planning?
The main purpose of life cover in this context is simple, to give your beneficiaries the money to pay the inheritance tax bill without needing to sell assets.
This is especially important when an estate includes less liquid assets such as the family home, a business, properties that take time to sell or simply assets you want your family to keep rather than liquidate
Many families don’t have large sums of cash available at short notice. Without liquidity, your beneficiaries may feel forced to sell something quickly, often at the wrong time or for the wrong price.
Life cover provides the breathing space they need.
2. Whole-of-Life Cover – The Most Common Option
For inheritance tax planning, the most suitable type of insurance is usually, but not always, whole-of-life cover.
Unlike term insurance (which ends after a set number of years), a whole-of-life policy pays out whenever you die, as long as premiums are maintained.
Some people choose cover equal to their full estimated IHT liability either today, or what it might be at average life expectancy. Others choose a smaller amount to provide partial support for example, covering the tax bill on the family home so the children can keep it. Your adviser can help you understand the key benefits of the different life cover policies and how they are relevant to you. They can even to help set up a withdrawal strategy from your investments to pay for the cover.
3. Why Writing the Policy in Trust Really Matters
This is the most important part of using life cover for IHT planning. Placing the policy in trust means that the money bypasses probate entirely, essential to ensure the funds are paid out as quickly as possible to allow the inheritance tax to be paid without delay.
It also means, and this is the most crucial part, the payment does not form part of the estate for inheritance tax. There is little point in holding a life cover policy not written in trust, that would form part of the estate and itself be subject to inheritance tax.
Although this is the case, we regularly come across people that have life cover in place, from before they have started working with Howard Wright, where a trust hasn’t been used.
4. How Life Cover Supports Your Wider Planning
Life cover works best when combined with other planning tools. Here are a few examples of how it fits into the bigger picture:
A. When gifting is appropriate, but not ideal on its own
If you want to protect assets for your family but also keep financial security for yourself, you might not want to give away too much too soon.
Life cover lets you keep control of your assets, maintain your income whilst still giving your beneficiaries the liquidity they’ll need later
B. When your estate includes illiquid or sentimental assets
Life cover prevents your beneficiaries from having to sell these under pressure. Examples of these assets might be a family home, a business, a holiday property or classic car collection
C. When pension rules change in 2027
With pension pots becoming part of the taxable estate from April 2027, many clients will find their expected IHT exposure increasing. Some families may choose to use life cover as a simple way to offset this new liability without restructuring pensions they still rely on or would have to pay significant tax on should they take large withdrawals
5. What Are the Downsides?
Life cover is not the right choice for everyone and for some, such as those with significant health concerns, cover may not be possible at all.
Whole-of-life cover is generally more expensive than term cover because the insurer knows they will eventually have to pay. The will set premiums based on a number of factors such as age, health, size of the payout and the type of premium (fixed or reviewable). It is important to ensure as part of your planning that the premiums are not only affordable now, but will remain so throughout your life. Remember, the policy is only useful if it stays in place for life, so premiums must be comfortably affordable long-term.
Ultimately life cover does not reduce your estate or the tax bill, it simply provides the funds to pay the tax. For some it will be the only way to mitigate the tax but for others, it can be used as part of a planning strategy which combines the use of life cover with making use allowances as well as making gifts either directly to beneficiaries of into trust.
And Finally…
As part of your ongoing planning, we will continue to review your inheritance tax position and discuss the use of life cover if appropriate. If you have any friends, family members, or colleagues who might also benefit from understanding how life cover could support their own financial plans, please feel free to pass this information on. We’re always happy to help them review their position and explore their options.
Disclaimer: This article contains information from sources believed to be reliable but no guarantee, warranty, or representation, express or implied, is given as to its accuracy or completeness. Howard Wright Ltd does not undertake any obligation to update or revise any future statements. Past performance is not a reliable indicator of future results. Investments can go down as well as up and actual results could differ materially from those anticipated. This article is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any person as such, the information contained in this article is not intended to constitute, and should not be construed as, investment or financial advice. Appropriate personalised advice should be taken before entering into any transactions. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication. Howard Wright Ltd is Authorised and regulated by the Financial Conduct Authority.