Should you consider life insurance to manage your inheritance tax bill?

Life insurance sales have climbed as growing numbers of families look for ways to safeguard their estates – with some experts suggesting inheritance tax (IHT) reforms could be prompting renewed interest in cover.

Data from the Financial Conduct Authority (FCA), analysed by TWM Solicitors, shows total life insurance premiums rose by 18% last year. The total value of sales grew from £378m to £447m in the year ending March 2025 – up £123m from £324m in 2022-23. 

Here, Which? explores what might be behind the rise in life insurance sales, how these policies can feature in estate planning, and what to consider before using this approach. 

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What's driving the demand for life insurance?

In her first Budget as chancellor, Rachel Reeves announced reforms to agricultural property relief (APR) and business property relief (BPR).

From April 2026, large farms and businesses will no longer be fully exempt from IHT, with relief capped at £1m. Any value above that will face a 20% IHT charge.

Pension savings are also to be brought into the 40% IHT net from April 2027, meaning more estates could be affected.

Government forecasts suggest this change will lead to an additional 10,500 estates paying IHT in 2027-28, with a further 38,500 facing a higher bill. The average inheritance tax liability is expected to rise by £34,000.

While the FCA data doesn’t explain why life insurance sales have risen, experts say awareness of these tax changes and the growing number of people likely to be affected may be prompting some families to explore life cover as part of wider estate planning.  

Alan Richardson, head of product at life insurance provider LifeSearch, said: 'The proposed changes by the government to stop the use of pensions for intergenerational wealth transfer appear to be having an impact, with some consumers now looking at gifting and life insurance as an alternative solution.

'We’ve seen a notable increase in consumers seeking to cover gifts, often as a result of customers seeking to move money from their pensions early to make regular gifts to family members.’

• Find out more: best life insurance in the UK 2025

How life insurance can help with an IHT bill 

If your life insurance policy is written in trust, the payout is usually exempt from IHT, meaning it can help beneficiaries settle the bill without having to sell assets.

Life insurance provides a lump-sum payout that can be used to cover the tax due. This is particularly useful if you’re worried executors may struggle to pay within the short deadline. Under IHT rules, the bill must usually be paid within six months of death.

Some people take out fixed-term policies that cover them for a specific period, while others choose whole-of-life cover, which guarantees a payout upon death. 

Richardson added that life insurance can also help with cash-flow issues when paying IHT, as the money can often be released 'within days'. Without this, families might need to take out a bridging loan or remortgage to pay the bill on time.

However, if a policy isn’t written in trust, the payout could be added to the value of the estate and potentially be subject to IHT if it exceeds the £325,000 threshold. 

• Find out more: the different types of policy explained

What to watch out for 

Before you take out a policy, experts recommend exploring other ways to reduce inheritance tax, such as gifting, as life insurance can be expensive, particularly whole-of-life cover, which guarantees a payout whenever you die. 

Premiums can be high

According to LifeSearch data, a 65-year-old couple would pay around £676 a month for £500,000 of cover, while a 75-year-old couple would pay around £1,147 a month. 

The cost depends on your age, health, how long you live and the amount you want to insure – usually based on your estate’s estimated IHT bill.

If you live much longer than expected, you could end up paying more in premiums than the policy eventually pays out, cancelling out any financial benefit. 

Joint policies that pay out on second death are often cheaper than two single policies, but they still require ongoing payments.

• Find out more: joint vs single life insurance: which is best?

It's a long-term commitment

Life insurance for IHT planning requires careful thought. Ongoing premiums can eat into disposable income, and missing payments may have different consequences depending on the type of policy.

With term assurance, insurers usually contact you if a payment is missed and give a short grace period to catch up. If it isn’t paid, the policy lapses and cover ends.

With whole-of-life policies, some of the plan's value typically remains if you stop paying, but it’s far lower than the original cover and can reduce over time. You can sometimes stop payments but fix the benefit at a lower amount.

Some reviewable policies start with low premiums that rise at each review. If you don’t accept the increase, your cover will fall – meaning you could pay in more than you get back. 

Fixed-premium term policies keep costs stable but only pay out if you die within the term.

For IHT planning, premiums on whole-of-life policies should fall within the £3,000 annual gift allowance or be affordable from regular income without affecting your standard of living. Otherwise, the premiums themselves could be treated as taxable gifts in the year before death.

• Find out more: whole-of-life insurance explained

Costs rise with age and health

Premiums increase sharply as you get older, and poor health can make cover prohibitively expensive or unavailable. Those who wait too long to apply may find the cost outweighs the benefit, or that they’re declined cover altogether. 

Policies can be complex

If a policy isn’t written in trust, the payout could be added to your estate and taxed. Writing the policy in trust means the proceeds can go directly to beneficiaries without forming part of your estate.

Most life insurers now provide straightforward trust or deed forms to make this easier, but it still adds an extra layer of paperwork to your estate planning – so it’s worth seeking specialist advice to ensure everything is set up correctly.

• Find out more: how to write life insurance in trust 

Cover may not keep pace with your estate

Estimating your future IHT bill can be difficult, as different assets grow at different rates.

Failing to account for this could mean your policy doesn’t provide enough cover, leaving your beneficiaries to make up the difference between the payout and the final IHT bill.

• Find out more: do I need life insurance for a mortgage?