Inheritance Tax: How life insurance can protect your wealth for beneficiaries
Andrew Tricker, 17 January 2026
Andrew Tricker, 17 January 2026
Recent changes to Inheritance Tax (IHT) laws have left many individuals reassessing how to best preserve the value of their estates.
One effective way to mitigate the impact of IHT is through life insurance, but it’s essential that these policies are managed correctly via a trust to avoid inadvertently increasing the IHT burden.
Life insurance policies are designed to pay out upon a person’s death and when structured properly, they can be used to cover the cost of IHT.
By doing so, the estate can be preserved in its entirety, allowing beneficiaries to inherit the full value without any of it being eroded by tax liabilities.
Having the right life insurance policy in place also avoids the need to sell any assets of the estate, such as property, to cover the tax bill. This means that family homes can be passed on to future generations or sold for the benefit of beneficiaries.
However, it’s crucial to arrange life insurance policies in a way that ensures they don’t add to the IHT bill, as payouts from policies that are not arranged properly may be included in the estate and be subject to IHT itself.
A previous report produced by Swiss Re and Insuring Change in 2023, found that only 21 per cent of life insurance policies were written into a trust at the time that would reduce IHT bills.
To avoid this, a strategic approach is required, particularly when it comes to how the policy is paid out.
To ensure that life insurance proceeds don’t increase your IHT liability the policy will need to be place in a trust.
When a life insurance policy is paid into a trust rather than directly to the deceased’s estate, it becomes ring-fenced from the estate’s assets, meaning it is not included in the IHT calculation.
Beneficiaries of the trust can access the life insurance pay-out without having to wait for probate, allowing them to use the funds to clear the tax liability ahead of the six-month deadline for paying IHT, ensuring that the estate is settled without any financial stress.
Research from TWM Solicitors in September 2025 found that, the total value of life insurance sales has jumped to £447 million for the year ending 31st March 2025 – an 18 per cent increase from £378m in the previous year.
This law firm attributes this sudden surge in premiums, at least in part, to the growing demand to use life insurance as a means to manage IHT bills.
If you already have an estate plan in place, it’s likely that you’ve considered trusts as part of your broader strategy. Trusts can offer many benefits, including protecting assets and ensuring that wealth is passed on to beneficiaries in a tax-efficient manner.
Working with an expert to structure your life insurance policies within a trust can help you to minimise the impact of IHT and avoid potential pitfalls. Our team is here to guide you through the process, helping you structure life insurance policies and trusts in a way that minimises IHT and maximises the benefit for your loved ones.
Get in touch with Director, Andrew Tricker (andrewtricker@lfwm.co.uk) to discuss your estate planning and ensure your wealth is protected for future generations.
The information included in this article may be subject to changes in taxation following its publication. This article is intended for informational purposes only and does not constitute advice. The Financial Conduct Authority does not regulate estate planning.
