Life Insurance for Inheritance Tax: Could It Help Protect Your Estate?
Nobody wants to leave their family with an unexpected tax bill.
With proposed changes set to bring unused pension funds within the scope of inheritance tax (IHT) from April 2027, many people are reviewing their estate planning arrangements. As a result, life insurance for inheritance tax is receiving renewed attention.
While life insurance will not reduce an inheritance tax liability, it may help provide funds to meet the bill when the time comes.
Why Is Life Insurance for Inheritance Tax Back in Focus?
Inheritance tax can create a challenge for families. In some cases, beneficiaries may need access to funds before an estate can be fully distributed.
This is where life insurance for inheritance tax can help.
A life insurance policy pays out a lump sum on death. If the policy is written in trust, the proceeds usually pass directly to the chosen beneficiaries rather than forming part of the estate.
As a result, beneficiaries may have access to funds more quickly, without waiting for the estate administration process to be completed.
What Are the Potential Benefits?
For some families, life insurance can provide several advantages.
Funds Available When Needed
Inheritance tax liabilities often arise before executors can distribute assets. Therefore, having funds available outside the estate may help ease financial pressure.
Protecting Family Wealth
Without available cash, executors may need to sell investments or other assets to meet an inheritance tax liability.
Life insurance can provide a source of funds and reduce the likelihood of this happening.
Tailored Cover
In some circumstances, you can arrange cover to reflect an estimated inheritance tax liability. This allows families to plan for potential future costs.
What Should You Consider?
Like any financial planning solution, life insurance is not suitable for everyone.
Cost of Premiums
Premiums generally increase with age and may also reflect health and lifestyle factors. Therefore, affordability remains an important consideration.
Trust Planning Matters
To achieve the intended outcome, you generally need to write the policy in trust. Without appropriate trust arrangements, beneficiaries may not receive the proceeds in the way you originally intended.
Regular Reviews Are Important
Inheritance tax liabilities can change over time as asset values rise or fall. Therefore, you should review any life insurance arrangements regularly to ensure they remain appropriate.
Is Life Insurance for Inheritance Tax Right for You?
Every family has different circumstances.
For some people, life insurance may form part of an effective estate planning strategy. For others, alternative solutions may be more appropriate.
The right approach will depend on your assets, objectives, health, age and overall financial situation.
How Fathom Can Help
At Fathom Financial, we help clients understand the options available when planning for inheritance tax.
If you are concerned about how future inheritance tax liabilities could affect your family, we can help you explore whether life insurance for inheritance tax forms part of an appropriate planning strategy.
Important Information
This article is for information purposes only and does not constitute financial advice. Any recommendations should be based on your individual circumstances and objectives.
Cover will cease on insurance products if premium payments are not maintained.
Trust planning and inheritance tax planning are not regulated by the Financial Conduct Authority (FCA).
The proposed inheritance tax changes referred to in this article are subject to legislation and may change before implementation.
