Questions about inheritance tax insurance are on the rise, but is it worthwhile?

Whole life insurance premiums can reach £5,000 per month to cover a £300,000 inheritance tax bill; the older you get, the more expensive the policy

Due to Rachel Reeves' budget changes, British citizens who are concerned about impending inheritance tax bills are resorting to a unique kind of insurance in order to cover the expense. However, those who are cash poor and asset rich may not be able to afford the hundreds of thousands of pounds per month that the coverage can cost.

As a means of covering an anticipated new wave of inheritance tax bills, financial advisers told BFIA they have seen an increase in inquiries regarding whole life insurance since the Autumn Budget 2024.

One kind of life insurance policy that offers lifetime coverage is whole life insurance, sometimes referred to as life assurance. As long as premiums are paid, it gives your beneficiaries a lump sum payment upon your passing.

It has no expiration date, in contrast to term life insurance. This makes it a popular option for people who want to pay for funerals, leave a legacy for their family, or lower their inheritance tax liability.

Rachel Reeves' announcement that pensions would be subject to inheritance tax starting in 2027 and that tens of thousands of family farms and businesses that had previously been exempt from inheritance tax would also be subject to it starting the following year served as the catalyst for the surge in demand for whole life insurance.

"We're seeing more demand and more clients asking about whole life policies, how they work, and how much they cost," stated Edward Durell, managing director at Cover Direct.

"Whole of life policies can be costly, but it's important to have a solid grasp of your situation, your future spending patterns, your gifting capabilities, and what might make up your final estate in order to ensure that the right value is insured and that the premium and coverage are as low as possible," he continued.

As with most insurance, whole life coverage costs more the older you start the policy, and many people wait too long, according to Alan Lakey, director of CIExpert.

Most people don't start thinking about whole life insurance until they are in their 70s and beyond, at which point the premiums are very high and usually out of their price range. The majority of these individuals have a lot of assets but low incomes, so IHT mitigation strategies are unworkable," Lakey said.

It demonstrates how early action can have positive effects.

A whole life policy costs how much?

The estimated average cost for a non-smoker in London in the 2026 - 2027 tax year would be about 1,000 per month, or 12,000 per year, to purchase a whole life policy at age 60 to cover the cost of a 300,000 inheritance tax bill.

This is based on exclusive data for BFIA from financial adviser CIExpert, an insurance specialist.

But wait another ten years until you're 70, which is when most people who are thinking about whole life insurance are, and that figure rises to almost 5,000 per month, or 60,000 annually, according to financial advisors.

The cost of a whole life policy is much more affordable at age 50, when you can act sooner. It costs £300 per month, or £4,800 annually.

However, whole life insurance premiums start to rise in tandem with the anticipated inheritance tax bill.

The cost of a whole life policy for a 60-year-old who needs to pay a £1 million inheritance tax bill increases to £1,400 per month, or £16,000 annually. At 70, it skyrockets to over 7,000 per month, or 87,600 annually.

In order to cover the costs of different amounts of inheritance tax, BFIA asked CIExpert to calculate the costs of taking out a whole life policy at different life stages.

Drafting a trust-based life insurance policy.

Clients who purchase a life insurance policy to cover inheritance tax are advised by financial advisors to ensure that the policy is written in trust.

Instead of going to your legal estate, the proceeds of a life insurance policy written in trust can be paid directly to your designated beneficiaries. This indicates that the payout has no IHT due.

Best Insurance's sales manager, Bronja Whitlock, stated: "Writing the policy into trust is crucial because there's no use in being covered if it's later taxed.

"Fortunately, the majority of providers' applications include an online trust section, making the process simple and guaranteeing that the funds are going to the appropriate person or people.

The number of lifestyle trusts opened for IHT planning increased by nearly 200 percent in 2024 compared to 2023, according to wealth manager Quilter, and uptake in 2025 is already expected to significantly exceed this level.