Best Life Insurance for Estate Planning UK
Leaving a legacy for your loved ones is a profound goal. Yet, for many in the UK, a significant portion of their hard-earned estate can be lost to Inheritance Tax (IHT). With IHT receipts reaching a record £7.5 billion in the 2023/24 tax year, effective estate planning has never been more critical.
Fortunately, with foresight and the right financial tools, you can ensure your wealth is passed on as you intend. Life insurance, when structured correctly, is one of the most powerful and straightforward strategies for protecting your legacy from the taxman.
This comprehensive guide will explore the best life insurance policies designed specifically for estate planning in the UK. We'll demystify Inheritance Tax, explain the crucial role of trusts, and provide actionable steps to secure your family's financial future. As expert brokers, we at WeCovr are dedicated to helping you navigate this complex landscape, ensuring your legacy is preserved for generations to come.
Policies Designed for Inheritance Tax and Legacy Planning
At its core, using life insurance for estate planning is about providing liquidity exactly when it's needed most. When you pass away, your executors must settle any Inheritance Tax due before they can distribute your assets to your beneficiaries. This can create a significant problem if your estate is 'asset-rich but cash-poor'—for instance, if its value is tied up in a family home.
Your loved ones might be forced to sell assets, potentially under pressure and below market value, simply to pay the tax bill. This is where a specific type of life insurance plan comes in.
A life insurance policy designed for IHT planning provides a lump sum payout on death. The key is that this policy must be written 'in trust'. By placing the policy in a trust, the payout does not form part of your legal estate. Instead, it is paid directly to your chosen beneficiaries (via the trustees) and can be used to pay the IHT bill, leaving the rest of your estate intact.
This simple, elegant solution ensures that your legacy—the home, savings, and investments you worked so hard for—can be passed on as you wished, without a forced fire sale to settle a tax liability.
Understanding Inheritance Tax (IHT) in the UK
Before diving into the insurance solutions, it's essential to grasp the basics of Inheritance Tax. IHT is a tax on the estate (the property, money, and possessions) of someone who has died.
Here are the key components for the 2024/2025 tax year:
1. The Nil-Rate Band (NRB) Every individual has an IHT-free allowance, known as the Nil-Rate Band.
- Current Threshold: £325,000
- This means the first £325,000 of your estate is not subject to IHT.
2. The Residence Nil-Rate Band (RNRB) This is an additional allowance available if you pass on your main home to your direct descendants (children, grandchildren, etc.).
- Current Threshold: £175,000
- This is added to your standard NRB, potentially giving you a total allowance of £500,000.
3. Transferable Allowances If you are married or in a civil partnership, any unused portion of your NRB and RNRB can be transferred to your surviving partner upon your death.
- This means a couple can potentially have a combined IHT allowance of up to £1 million (£500,000 x 2).
4. The IHT Rate Any part of your estate that exceeds your available allowances is typically taxed at a flat rate.
- Standard IHT Rate: 40%
The 7-Year Rule and Gifting Making gifts during your lifetime can be an effective way to reduce the value of your estate. Most gifts you make to other individuals are considered 'Potentially Exempt Transfers' (PETs). If you live for 7 years after making the gift, it falls completely outside your estate for IHT purposes.
If you die within 7 years, IHT may be due on the gift, subject to 'taper relief' which reduces the tax payable.
| Years Between Gift and Death | Tax Paid on Gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% |
Understanding these rules is the first step in calculating your potential IHT liability and determining the level of life insurance cover you might need.
Key Life Insurance Policies for IHT Planning
Not all life insurance is created equal when it comes to estate planning. The goal is to have a policy that pays out a sum sufficient to cover the tax bill, whenever that bill may arise.
Whole of Life Insurance
This is the cornerstone of IHT planning. A Whole of Life policy guarantees to pay out a lump sum when you die, no matter when that is. This certainty is what makes it so perfectly suited for covering a fixed liability like an IHT bill.
- Guaranteed Payout: Unlike term insurance which only covers a specific period, a Whole of Life plan provides lifelong cover.
- Premiums: You can choose between 'guaranteed' or 'reviewable' premiums.
- Guaranteed Premiums: The amount you pay is fixed for the life of the policy. It starts higher but provides long-term certainty.
- Reviewable Premiums: The premium starts lower but is reviewed by the insurer every 5 or 10 years. It will likely increase as you get older.
For IHT planning, a guaranteed premium Whole of Life policy is often preferred for its predictability, allowing you to budget effectively for the long term.
Joint Life Second Death Policies
For couples, a 'Joint Life Second Death' policy is often the most efficient and cost-effective solution.
- How it works: The policy covers two lives but only pays out after the second person has passed away.
- Why it's ideal for IHT: Due to the transfer of unused allowances between spouses, the main IHT liability for a couple typically crystallises on the second death. This policy is designed to align perfectly with that event, providing the funds exactly when the tax bill is due.
- Cost-Effective: Premiums for a second-death policy are significantly lower than for two separate single-life policies or even a joint first-death policy.
Gift Inter Vivos Insurance
This is a specialist form of term life insurance designed to cover the potential IHT liability on a large gift (a Potentially Exempt Transfer, or PET).
- Purpose: It protects your beneficiaries from an unexpected tax bill if you were to die within 7 years of making the gift.
- Structure: This is typically a 7-year decreasing term policy. The level of cover reduces over time, mirroring the taper relief on the IHT due. If you die in year one, it pays the full amount; if you die in year six, it pays a much smaller amount, reflecting the reduced tax liability.
- Peace of Mind: It allows you to make substantial gifts to your children or grandchildren—perhaps for a house deposit or university fees—with the confidence that they won't be burdened with a tax bill if you pass away unexpectedly.
The Crucial Role of Trusts in Estate Planning
This cannot be overstated: a life insurance policy for IHT planning is only effective if it is written in trust.
Think of a trust as a legal and financial wrapper that you place around your policy. The trust owns the policy, keeping it separate from your personal assets and, therefore, outside of your estate.
Why Writing a Policy in Trust is Essential
- It Avoids Inheritance Tax on the Payout: If your policy is not in trust, the lump sum payout is added to your estate's value. This can inflate your estate, potentially pushing it into a higher tax bracket and increasing the very IHT bill it was designed to pay. It’s a self-defeating outcome.
- It Avoids Probate: Probate is the legal process of validating a will and distributing an estate's assets. It can take months, or even years. A policy in trust bypasses probate entirely. The trustees can claim the funds from the insurer as soon as a death certificate is issued, making the money available quickly to pay the IHT bill.
- It Gives You Control: When you set up a trust, you appoint trustees (people you trust to manage the funds) and name beneficiaries (the people you want to benefit). This ensures your wishes are carried out precisely.
Most UK insurers provide standard trust forms free of charge, and a good broker can guide you through completing them correctly. At WeCovr, we ensure this vital step is never overlooked, helping our clients with the paperwork to secure their policy's tax-efficient status from day one.
Calculating How Much Cover You Need
To arrange the right life insurance policy, you first need a clear estimate of your potential IHT liability. Here’s a simplified, step-by-step guide.
Step 1: Estimate the Value of Your Estate List all your assets and their approximate market value.
- Property (your home, buy-to-let properties)
- Savings and cash in bank accounts
- Investments (ISAs, shares, unit trusts)
- Pensions (only certain types; defined contribution pensions are usually IHT-free)
- Valuable possessions (cars, art, jewellery)
- Payouts from any life insurance policies not written in trust
Step 2: Deduct Your Liabilities Subtract any outstanding debts.
- Mortgages
- Loans and credit card balances
Step 3: Apply Your Allowances Subtract your available IHT-free allowances.
- Nil-Rate Band (£325,000 per person)
- Residence Nil-Rate Band (£175,000 per person, if applicable)
- Any transferable allowances from a deceased spouse
Step 4: Calculate Your Potential IHT Bill The remaining figure is the value of your estate subject to IHT.
- Multiply this amount by 40% (0.40) to find your estimated IHT liability.
Example IHT Calculation for a Couple
Let's look at a hypothetical example for a married couple, David and Sarah.
| Asset / Liability | Value | Notes |
|---|---|---|
| Assets | ||
| Family Home | £850,000 | Owned jointly |
| Savings & Investments | £400,000 | |
| Cars & Possessions | £50,000 | |
| Total Assets | £1,300,000 | |
| Liabilities | ||
| Outstanding Mortgage | -£100,000 | |
| Net Estate Value | £1,200,000 | |
| Allowances on Second Death | ||
| David's NRB + RNRB | -£500,000 | Transferred to Sarah |
| Sarah's NRB + RNRB | -£500,000 | |
| Total Allowances | -£1,000,000 | |
| Estate Value Subject to IHT | £200,000 | (£1.2M - £1M) |
| Potential IHT Bill @ 40% | £80,000 |
In this scenario, David and Sarah would need a £80,000 Whole of Life policy, written in trust on a joint-life, second-death basis, to ensure their children can pay the IHT bill without having to sell assets.
Special Considerations for Business Owners and Directors
Estate planning for entrepreneurs and company directors involves extra layers of complexity and opportunity. While your personal estate needs protection, so does the business you've built.
Business Property Relief (BPR)
Business Property Relief is a vital IHT concession. It can provide relief of either 50% or 100% on the value of business assets, provided you've owned them for at least two years.
- 100% Relief: Typically applies to shares in an unlisted company (like a private limited company) or an interest in a sole trader business or partnership.
- 50% Relief: May apply to shares controlling more than 50% of the voting rights in a listed company, or land, buildings, and machinery owned by the deceased but used by their business.
BPR can significantly reduce or even eliminate IHT on your business interests, but it's crucial to get professional advice as the rules are complex and not all business assets qualify.
Relevant Life Cover
This is a highly tax-efficient life insurance policy that a limited company can take out for an employee, including a director.
- How it works: The company pays the premiums, which are typically treated as an allowable business expense for Corporation Tax purposes.
- The Benefits: The payout is made via a discretionary trust, so it is free from IHT and does not form part of the employee's lifetime pension allowance. It's an excellent way for directors of small companies to secure substantial death-in-service benefits for their families in a tax-advantaged way.
Shareholder or Partnership Protection
What would happen to your business if you or a fellow shareholder died? Shareholder Protection insurance provides a solution.
- Purpose: It provides a lump sum to the surviving shareholders, giving them the funds to buy the deceased's shares from their estate.
- Benefits: This ensures a smooth transition of ownership, prevents shares from falling into the wrong hands, and provides the deceased's family with a fair cash value for their inherited shares. It is a critical component of business succession planning.
Beyond Life Insurance: A Holistic Approach to Legacy Planning
While life insurance is a powerful tool, it should be part of a wider legacy planning strategy.
- Make a Will: This is the most important financial document you will ever create. Without a valid will, your estate will be distributed according to the rigid rules of intestacy, which may not reflect your wishes at all.
- Use Your Gifting Allowances: You can gift up to £3,000 each tax year completely free of IHT. You can also make small gifts of up to £250 to as many people as you like. Using these allowances regularly can chip away at the value of your estate over time.
- Leverage Your Pension: Under current rules, defined contribution pensions can be passed on IHT-free. This makes them one of the most efficient vehicles for intergenerational wealth transfer.
- Consider a Lasting Power of Attorney (LPA): An LPA allows you to appoint someone you trust to make decisions about your finances or health if you are no longer able to do so yourself. It's a vital document for protecting your welfare and assets during your lifetime.
Health, Wellness, and Your Premiums
It’s worth noting that your health and lifestyle have a direct impact on the cost of life insurance. Insurers favour applicants who lead healthy lives. Quitting smoking, maintaining a healthy weight, and managing chronic conditions can lead to significantly lower premiums.
At WeCovr, we believe in supporting our clients' overall wellbeing. That's why, in addition to finding you the best policy, we provide our customers with complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app. It's a small way we can help you on your journey to better health, which in turn can lead to better insurance rates.
How to Get the Right Policy: The Role of an Expert Broker
Navigating Inheritance Tax, trusts, and the myriad of life insurance products can be daunting. This is not a journey you should take alone. An independent, specialist insurance broker is your most valuable ally.
Generic comparison websites can provide quotes, but they cannot offer the tailored advice needed for something as nuanced as estate planning. A misstep, like failing to use a trust, can render the entire strategy ineffective.
This is what we do at WeCovr:
- We Listen: We start by understanding your unique family situation, your financial assets, and your legacy goals.
- We Calculate: We help you perform a detailed analysis of your potential IHT liability.
- We Compare: We use our expertise and access to the entire UK market to compare policies from all the major insurers, finding the most suitable and cost-effective solution for you—whether that's a Whole of Life plan, a Gift Inter Vivos policy, or a specialist business protection plan.
- We Guide: We manage the application process from start to finish and, most importantly, provide expert guidance on completing the trust forms to ensure your policy is correctly structured for maximum IHT efficiency.
Estate planning is an act of love and responsibility. It’s about ensuring that the fruits of your life's work provide security and opportunity for the people you care about most. With the right advice and the right tools, you can create a lasting legacy that is protected, preserved, and passed on according to your wishes.
Don't leave your legacy to chance. Take control today.
Can I use my existing life insurance for Inheritance Tax planning?
What happens if I don't write my life insurance policy in trust?
Are life insurance premiums for IHT planning tax-deductible?
How much does Whole of Life insurance cost?
Do I still need a will if I have life insurance in a trust?
Can my beneficiaries get the life insurance payout before probate is granted?
Why life insurance and how does it work?
What is Life Insurance?
Life insurance is an insurance policy that can provide financial support for your loved ones when you or your joint policy holder passes away. It can help clear any outstanding debts, such as a mortgage, and cover your family's living and other expenses such costs of education, so your family can continue to pay bills and living expenses. In addition to life insurance, insurance providers offer related products such as income protection and critical illness, which we will touch upon below.How does it work?
Life insurance pays out if you die. The payout can be in the form of a lump sum payment or can be paid as a replacement for a regular income. It's your decision how much cover you'd like to take based on your financial resources and how much you'd like to leave to your family to help them deal with any outstanding debts and living expenses. Your premium depends on a number of factors, including your occupation, health and other criteria.The payout amount can change over time or can be fixed. A level term or whole of life policy offers a fixed payout. A decreasing term policy offers a payout that decreases over the term of the cover.
With critical illness policies, a payout is made if you’re diagnosed with a terminal illness with a remaining life expectancy of less than 12 months. While income protection policies ensure you can continue to meet your financial commitments if you are forced to take an extended break from work. If you can’t work because you’ve had an accident, fallen sick, or lost your job through no fault of your own, income protection insurance pays you an agreed portion of your salary each month.
Income protection is particularly helpful for people in dangerous occupations who want to be sure their mortgage will always be covered. Income protection only covers events beyond your control: you’re much less likely to be covered if you’re fired from your job or if you injure yourself deliberately.
Questions to ask yourself regarding life insurance
Just ask yourself:👉 Who would pay your mortgage or rent if you were to pass away or fall seriously ill?
👉 Who would pay for your family’s food, clothing, study fees or lifestyle?
👉 Who would provide for the costs of your funeral or clear your debts?
👉 Who would pay for your costs if you're unable to work due to serious illness or disability?
Many families don’t realise that life, income protection and critical illness insurance is one of the most effective ways to protect their finances. A great insurance policy can cover costs, protect a family from inheriting debts and even pay off a mortgage.
Many would think that the costs for all the benefits provided by life insurance, income protection insurance or critical illness insurance are too high, but the great news is in the current market policies are actually very inexpensive.
Benefits offered by income protection, life and critical illness insurance
Life insurance, income protection and critical illness insurance are indispensable for every family because a child loses a parent every 22 minutes in the UK, while every single day tragically 60 people suffer major injuries on the UK roads. Some people become unable to work because of sickness or disability.Life insurance cover pays out a lump sum to your family, loved ones or whomever you choose to get the money. This can be used to secure the financial future of your loved ones meaning they would not have to struggle financially in the event of your death.
If it's a critical illness cover, the payout happens sooner - upon diagnosis of a serious illness, disability or medical condition, easing the financial hardship such an event inevitably brings.
Income protection insurance can be very important for anyone who relies on a pay check to cover their living costs, but it's especially important if you’re self-employed or own a small business, where your employment and income is a bit less stable. It pays a regular income if you can't work because of sickness or disability and continues until you return to paid work or you retire.
In a world where 1 in 4 of us would struggle financially after just four weeks without work, the stark reality hits hard – a mere 7% of UK adults possess the vital shield of income protection. The urgency of safeguarding our financial well-being has never been more palpable.
Let's face it – relying on savings isn't a solution for everyone. Almost 25% of people have no savings at all, and a whopping 50% have £1,000 or less tucked away. Even more concerning, 51% of Brits – that's a huge 27 million people – wouldn't last more than one month living off their savings. That's a 10% increase from 2022.
And don't even think about state benefits being a safety net. The maximum you can expect from statutory sick pay is a mere £109.40 per week for up to 28 weeks. Not exactly a financial lifeline, right?
Now, let's tackle a common objection: "But I have critical illness insurance. I don't need income protection too." Here's the deal – the two policies apply to very different situations. In a nutshell:
- Critical illness insurance pays a single lump sum if you're diagnosed with or undergo surgery for a specified potentially life-threatening illness. It's great for handling big one-off expenses or debts.
- Income protection, on the other hand, pays a percentage of your salary as a regular payment if you can't work due to illness or injury. It's the superhero that tackles those relentless monthly bills.
Types of life insurance policies
Common reasons for getting a life insurance policy are to:✅ Leave behind an amount of money to keep your family comfortable
✅ Protect the family home and pay off the mortgage in full or in part
✅ Pay for funeral costs
Starting from as little as a couple of pounds per week, you can do all that with a Life Policy.
Level Term Life Insurance
One of the simplest forms of life insurance, level term life insurance works by selecting a length of time for which you would want to be covered and then deciding how much you would like your loved ones to receive should the worst happen. Should your life insurance policy pay out to your family, it would be in a lump sum amount that can be used in whatever way the beneficiary may wish.
Decreasing Term Life Insurance
Decreasing term life insurance works in the same way as level term, except the lump sum payment amount upon death decreases with time. The common use for decreasing term life cover is to protect against mortgage repayment as the lump sum decreases along with the principal of the mortgage itself.
Increasing Term Life Insurance
Increasing term life insurance aims to pay out a cash sum growing each year if the worst happens while covered by the policy. With increasing term life cover amount insured increases annually by a fixed amount for the length of the policy. This can protect your policy's value against inflation, which could be advantageous if you’re looking to maintain your loved ones’ living standards, continue paying off your mortgage in line with its repayment schedule and cover your children’s education fees.
Whole of Life Insurance
Whereas term life insurance policies only pay out if you pass away during their term, whole of life insurance pays out to your beneficiaries whenever this should happen. The most common uses for whole life insurance are to cover the costs of a funeral or as a vehicle for your family's inheritance tax planning.
Family Income Benefit
Family income benefit is a somewhat lesser-known product in the family of life insurance products. Paying out a set amount every month of year to your beneficiaries, it is the most cost-effective way of maintaining your family's living standards to an age where you'd expect them to be able to support themselves financially. The most common use would be for a family with children who are not working yet so are unable to take care of themselves financially.
Relevant Life Insurance
Relevant Life Insurance is a tax-efficient policy for a director or single employee. A simple level term life insurance product, it is placed in a specific trust to ensure its tax efficiency. The premiums are tax deductible and any benefit payable should a claim arise is also paid out tax free, which makes it an attractive product for entrepreneurs and their businesses.
Important Fact!
We can look at a more suitable option mid-term!
Why is it important to get life insurance early?
👉 Many people are very thankful that they had their life, income protection, and critical illness insurance cover in place before running into some serious issues. Critical illness and income protection insurance is as important as life insurance for protecting your family's finances.👉 We insure our cars, houses, bicycles and even bags! Yet our life and health are the most precious things we have.
Easily one of the most important insurance purchases an individual or family can make in their lifetime, the decision to buy life, income protection, critical illness and private medical health insurance can be made much simpler with the help of FCA-authorised advisers. They are the specialists who do the searching and analysis helping people choose between various types of life insurance policies available in the market, including income protection, critical illness and other types of policies most suitable to the client's individual circumstances.
It certainly won't do any harm if you speak with one of our experienced FCA-authorised insurance partner experts who are passionate about advising people on financial matters related to life insurance and are keen to provide you with a free consultation.
You can discuss with them in detail what affordable life, income protection, critical illness or private medical health insurance plan for the necessary peace of mind they would recommend! WeCovr works with some of the best advisers in the market.
By tapping the button below, you can book a free call with them in less than 30 seconds right now:
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WeCovr is an insurance specialist for people valuing their peace of mind and a great service.👍 WeCovr will help you get your private medical insurance, life insurance, critical illness insurance and others in no time thanks to our wonderful super-friendly experts ready to assist you every step of the way.
Just a quick and simple form and an easy conversation with one of our experts and your valuable insurance policy is in place for that needed peace of mind!