Life cover and inheritance tax

Although not a way to avoid inheritance tax, life cover can also be a useful tool for Inheritance Tax planning. It does not reduce your Inheritance Tax liability, but it can be used to pay it!


It is relatively simple, you pay the regular payment for life cover, and in the event of your death (or deaths) the life cover is paid out to pay the tax. 

The aim is that the amount of life cover is equal to the Inheritance Tax liability.


There are generally two types of life cover used to protect and pay an Inheritance Tax liability a whole of life plan which provides cover for as long as you live, or a term assurance (for a fixed term).


To find out more, contact us on 01793 686393 to find out how life cover could pay for your inheritance tax.

Here’s how it could work:

Two types of Life Cover...

Whole of Life Cover – Key Points

  • This provides life cover for as long as you live – i.e. there is no fixed term
  • It can be taken out to cover one or two people
  • The amount of cover is normally set at an amount equal to the Inheritance Tax liability
  • This method is generally suitable for people who don’t want to give up access to any of their capital, or its future growth
  • You need to be in reasonably good health to get such a plan
  • It is possible to effect this type of plan by paying for it monthly/annually – or less commonly by a one off payment.
  • The plan is placed under trust so that the proceeds do not form part of your estate
  • For joint plans (for cover for two people), they are usually taken out as “joint life second death”. This means that on the death of the first plan holder no payment is due. It is only after both policy holders have died is payment due
  • A whole of life plan is really just an investment contract. You invest money, and each month part of the investment is taken to pay for the cost of the life cover.*

Term assurance – Key Points

  • Term assurance has a fixed term. So is generally only suitable when there is a known period of liability
  • This will usually mean when you have made a gift, and need to survive for seven years as the gift becomes a PET – a Potentially Exempt Transfer
  • Some life insurance companies offer plans specifically designed to cover PETs. These are known as Gift Inter Vivos Plans (“gift between the living” in Latin)
  • It is also possible to effect a Term plan that has a conversion option. This means that it is possible to change the plan into a whole of life plan at a later date
  • Again, for term assurance you need to be in reasonably good health to get this sort of cover, and will not be suitable for everyone

If you want advice on how to reduce your tax, or have a question, or just want to have a chat about reducing you tax liability with a UK Qualified Independent Financial Adviser, then phone now on 01793 686393 or contact us online. 

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