Inheritance tax – Taking out life insurance to pay inheritance tax

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

This article is an extract from Octopus Investments' publication "A guide to untangling inheritance tax" and it is reproduced with its permission. Read more about Octopus Investments

The article has been written in accordance with Octopus Investments’ understanding of the law and interpretation of it at the time of publication: remember tax rules can change and benefits depend on circumstances.

There are two types of policies that can help with inheritance tax: whole-of-life assurance and term insurance. Assurance is intended to cover you until you pass away, whereas insurance covers you for a set period of time.

1. Whole-of-life policy

With this type of policy, you specify an amount to be paid out after you die. Your beneficiaries could then use this lump sum to pay any inheritance tax due to HMRC.

2. Term policy

Another way to insure against an inheritance tax bill is to take out a ‘level-term’ or ‘decreasing term’ policy.

This will pay a lump sum in the event of your death during a specific time frame. This could be useful if you’ve given large sums of money away in recent years, but you are worried that you may not live the full seven years before these gifts fall outside of your estate. Your policy would then pay an amount that could be used to cover the inheritance tax due on the gifts. Insurance can be expensive, and it gets more expensive as you get older. It usually also involves taking a health assessment before cover can be granted, which can be off-putting for many people.

If you’re considering taking out insurance to take care of an inheritance tax liability, it may be helpful to think of it as effectively paying the inheritance tax bill yourself, in the form of the insurance premiums.

Most life insurance policies will form part of your taxable estate when you die, but if the policy is ‘written into trust’, any payouts from the policy after your death will be outside of your estate for inheritance tax purposes. Because of the complexities, it’s always worth getting good financial advice and shopping around for the most competitively priced policy to suit your specific needs.


Taking out insurance doesn’t reduce the amount of inheritance tax due on an estate, it is simply another way to pay a potential inheritance tax bill.

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Important: The information on this website is for experienced investors. This is a very short summary of a complex subject. It is not advice nor a personal recommendation. This article is intended solely to provide basic information – neither Octopus Investments nor Wealth Club offer life insurance products. If you are unsure, please seek specialist advice. Investments that qualify for inheritance tax relief place your capital at risk, and the value of the investment can fall or rise.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 

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