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Using Life Insurance to Pay Inheritance Tax in the UK

Life Insurance can be used for Inheritance Tax planning in the UK. Knowing when and what type of Life Insurance to buy is a difficult task and often one that people don’t think about until they need it. If you are reading this, you are probably at an age where your family will benefit from your life insurance payout to cover inheritance tax. Inheritance tax planning in London is never hard with trusted inheritance tax advisers in the UK.

What is Inheritance Tax?

Inheritance tax is a tax that is levied on the value of an estate when it is passed down to beneficiaries. The amount of inheritance tax that is due will depend on the value of the estate and the relationship between the deceased and the beneficiaries. In order to avoid paying inheritance tax, it is important to have a life insurance policy in place that will cover the value of the estate.

What are the different types of life insurance?

There are three types of life insurance: term life insurance, whole-of-life insurance, and universal life insurance.

Term life insurance is the most basic type of life insurance. It provides coverage for a set period of time, usually 10, 20, or 30 years. If you die during the term of the policy, your beneficiaries will receive a death benefit. If you don’t die during the term, the policy expires and you get nothing.

Whole of life insurance is a more permanent type of life insurance. It covers you for your entire lifetime as long as you continue to pay premiums. Whole of life also has a cash value component that builds up over time. This cash value can be used to pay premiums or borrowed in case of an emergency.

Universal life insurance is similar to whole of life insurance, but with more flexibility. Universal life allows you to adjust your premium payments and death benefit amount as needed. The cash value component also grows at a variable rate, so it can be used for different purposes than just paying premiums.

How do life insurance policies work?

Inheritance tax is a tax that is levied on the estate of a deceased person. The amount of inheritance tax that is due will depend on the value of the estate and the relationship of the beneficiaries to the deceased person.

There are two types of life insurance policies that can be used to pay inheritance tax: whole of life insurance and term life insurance. Whole of life insurance policies are permanent policies that will remain in force for the duration of the insured person’s life. Term life insurance policies, on the other hand, only remain in force for a set period of time (usually 10-20 years).

If a life insurance policy is used to pay inheritance tax, the death benefit from the policy will be paid directly to the government. This means that beneficiaries will not receive any money from the policy. 

Before choosing a life insurance policy to pay inheritance tax, it is important to understand how each type of policy works and to compare different policies to find one that best meets your needs.

How can life insurance policies help pay inheritance tax?

Life insurance policies can help your heirs to pay inheritance tax if and when it is due. 

Once life insurance is paid, it becomes a part of the estate and hence becomes taxable as a part of the inheritance. If your heirs do not have liquid assets to pay the inheritance tax bill, they may have to sell their property to pay the tax. However, if you have an insurance policy, the sum can be paid from this amount. 

We recommend putting the life insurance policy in a trust. A trust is not a part of your taxable estate but it still belongs to named beneficiaries. Life insurance policies in a trust are not taxable and can be used to pay inheritance tax, if any is due. Using trusts for inheritance planning is recommended by good inheritance tax advisers in the UK.


There’s no easy answer when it comes to how to get your life insurance to pay your inheritance tax. However, by consulting an inheritance tax expert, you can save yourself a lot of time and effort. First and foremost, be sure to shop around for the right life insurance policy for your needs. There are many different types of policies available, so it’s important to find one that fits your unique circumstances. Once you have a policy in place, make sure you keep up with the payments. If you can do both of these things, you’ll be much more likely to have your life insurance policy payout when you need it most.

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