How to buy life insurance Minimise your estate's inheritance tax bill

Older couple

A whole-of-life or decreasing-term life insurance policy can be a good way to cover a potential inheritance tax (IHT) bill

There are two key ways you can use a life insurance policy to reduce the amount of inheritance tax your estate will have to pay. 

Whole-of-life insurance policies

If you think your estate will have to pay inheritance tax (IHT) when you die, you could set up a whole-of-life insurance policy to cover the tax due, meaning that more is passed to your beneficiaries. To ensure the proceeds of the life insurance policy are not included in your estate, though, it is vital that the policy be written in trust. This is a very complicated area of estate planning and is best done with the help of a professional, such as a solicitor or independent financial adviser (IFA).

A whole-of-life policy has a double benefit - not only are the proceeds of the policy outside your estate for IHT purposes, the premium paid for the policy will reduce the value of your estate while you're alive, further reducing your estate's future IHT bill.

Looking to buy life insurance?

If you decide you need advice, make sure you consult an independent life insurance broker.

Which? Financial Services can refer you to an impartial, no-obligation third-party advice service to provide you with the best life insurance or mortgage insurance policy tailored to your individual needs. 

Find out more about the life insurance referral service at Which? Financial Services.

Decreasing-term policies

An alternative to a whole-of-life policy is to give away part of your estate before you die. However, if you die within seven years of the gift, there could still be an IHT liability, as most gifts are deemed 'potentially exempt transfers' (PETs) for those seven years.

The good news is that the more time that passes, the less tax is due (as the tax due on a PET reduces, or is 'tapered', over the 7-year period). This makes a 7-year decreasing-term policy a good way (and, equally important, a cheap way) to cover this potential IHT liability.

For more details on cutting your inheritance tax bill bill, read the free Which? guide Inheritance tax explained.

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