Death, taxes and why life cover is becoming more important for estate planning

Life insurance cover is often grossly misunderstood. No one hopes to gain ‘value for money’ with a typical term life insurance policy, as it means they’re no longer around to enjoy the proceeds.

But cover that’s taken out as an estate planning tool is an entirely different proposition. Simply put, it allows families to monetise the certainty around death while removing the uncertainty around tax. 

That idea has always been true, but it has rarely mattered as much as it does today. The inheritance tax (IHT) landscape is becoming more challenging as reliefs are narrower, allowances are frozen, pensions are set to become liable and more estates fall into the net.

As a result, life cover is having a resurgence as a practical planning tool that allows other strategies to work properly.

Here, we look at why life cover has moved from optional to increasingly relevant, not because the product has changed, but because the tax environment has.

Business relief and agricultural relief are being restricted from April 2026, the scope for exemptions is growing narrower, and pensions are now set to form a significant part of many estates when the changes are set to come into force in April 2027. As a result, pensions, once not even in the IHT conversation, are now central to those plans, particularly for clients who have accumulated large defined contribution pots. 

Combining these changes with frozen allowances and rising asset values, it means more families are facing inheritance tax liabilities that are both larger and harder to fund from existing liquidity.
The result is not that planning no longer works, but that it no longer removes every risk.

In practical terms, the most common way for a life policy is used to mitigate IHT is by using a whole of life policy written in trust. The cover is designed to match the expected inheritance tax exposure rather than replace income or cover debt. For example, if the current estimated IHT liability is £300,000, a policy of £300,000 could be taken out to provide proceeds to the beneficiaries to pay this tax. 

Premiums are paid during lifetime and, because the policy pays out on death whenever that occurs, the proceeds are available precisely when the tax bill arises. When written in trust, the payout sits outside the estate and can be used immediately to fund inheritance tax, provide liquidity to a trust or prevent the forced sale of assets.

The role of the policy is not to remove tax, but to make a known liability manageable and predictable. Of course there are costs involved with a whole of life policy, and premiums can become costly as the life assured ages. It’s important that this cost is properly weighed up against the IHT benefit, ideally through comprehensive cashflow modelling. It’s also important to note that policies are subject to medical underwriting, and not all individuals can get cover.

When viewed purely as insurance, life cover is easy to dismiss. If nothing happens, the premiums feel wasted. That mindset changes when life cover is framed as a financial tool rather than a product.
In planning terms, life cover converts an uncertain future tax bill into a known and manageable cost today. It creates liquidity at the exact point it is needed, without forcing the sale of assets or the acceleration of other strategies. 

With death as a certainty, a whole of life insurance policy becomes a simple ‘investment’ equation. You can plan for an estimated total premium you’ll pay through your life expectancy and then consider that against the payout in the future to your estate.

Life cover is not only relevant for covering long term inheritance tax liabilities. It can also be used tactically to support larger lifetime gifts. Where clients are considering making significant gifts now, often funded from surplus capital or a pension commencement lump sum (PCLS), the main concern is the seven-year clock. If death occurs within that period, inheritance tax may still arise.

In these situations, seven-year term insurance can be used to cover the potential tax exposure during the taper period. This cover is typically much cheaper than whole of life insurance because it only needs to run for a fixed period. As a result, advisers are increasingly seeing clients make larger gifts earlier, knowing the risk is temporarily insured rather than left unmanaged.

Used alongside good estate planning, this approach can accelerate wealth transfer while keeping overall cost and complexity under control.

How premiums are funded matters as much as the cover itself. If it’s not sustainable, affordability can mean the policy has to be cancelled early, before a payout is received. Many clients can fund premiums from surplus income with no impact on lifestyle. Others may use pension drawdown strategically, start to drive income from investments differently or, in some cases, corporate structures where appropriate.

The objective is always sustainability. Cover should be affordable, maintainable and aligned to the size of the actual risk, not an arbitrary figure.

Life cover is often only considered once the exposure becomes obvious. By then, age, health or transaction timing can make cover unavailable or prohibitively expensive. Underwriting takes time and delays are common.

Starting the conversation early preserves choice. It allows clients to decide whether life cover forms part of the plan, rather than being forced into a decision at the worst possible moment.

Trusts, business relief  planning, gifting strategies and pension structuring remain fundamental. In many cases they significantly reduce inheritance tax exposure and shape how and when wealth passes to the next generation. Well executed planning can cut liabilities dramatically and is often the reason life cover is affordable at all.

However, even the best planning rarely eliminates inheritance tax completely for larger estates under the new rules. Residual liabilities remain, reliefs  can fall away at the wrong moment, politics can change rules quickly and timing risk cannot be planned out entirely. Life cover does not replace good planning. It supports it by dealing with what planning cannot fully remove.

The better the underlying planning, the smaller the amount of life cover required and the more manageable the premiums become.

Life cover itself has not changed, but the inheritance tax environment has. Fewer reliefs, larger taxable estates and greater liquidity risk mean that life cover has come back to the fore for managing IHT liabilities.

Used properly, it monetises certainty around death while removing uncertainty around tax, which for many families makes it a core planning tool rather than an optional extra. To look at how your IHT position is impacted by the changing rules, and how life insurance could potentially help mitigate it, speak to your usual Evelyn Partners contact or book an appointment.