Protect your estate - cover inheritance tax with whole of life insurance
What is whole of life insurance?
Whole of life insurance truly is what it says on the tin - a type of life insurance policy that covers you for the whole of your life.
What a lot of people don’t know is that this policy can be a powerful estate planning tool. Unlike traditional life insurance, which only lasts for a set number of years, whole of life guarantees a payout whenever you pass away.
Having this policy in place gives you and your loved ones peace of mind, as well as financial protection whilst helping to manage potential inheritance tax liabilities.
What is inheritance tax (IHT) and how does insurance help?
Put simply, inheritance tax is a type of tax that may be paid when someone dies and passes on their money, property, or possessions.
The standard inheritance tax rate is 40%. It's only charged on the part of your estate that's above the tax-free threshold which is currently £325,000.
A whole of life policy can be a practical way to plan for inheritance tax by helping to cover the bill, without your family needing to dip into the estate itself.
The policy pays out a guaranteed lump sum whenever you pass away, which can be used to settle any inheritance tax owed. For this to be effective, the policy should be written in trust, as this is what keeps the payout outside your estate.
What are the benefits of this policy?
- Cover the inheritance tax (IHT) bill - Setting up a whole of life insurance policy in trust can help cover inheritance tax if you exceed the threshold. The life insurance payout itself isn’t subject to tax.
- The power of a trust - If you’re taking out your whole of life policy as an estate planning tool, placing the policy in trust is essential to keep the payout outside the taxable estate. A policy in trust means your loved ones can get quick access to funds and avoid further tax liability.
- Guaranteed payout - Unlike term insurance, whole of life means just that, it pays out whenever you pass away, not just within a set term.
- Peace of mind - Arguably the biggest benefit of them all, using a whole of life insurance policy to make sure your loved ones have a financial safety net at a time when they need it the most.
A breakdown
Here is a simple breakdown to show how inheritance tax works and how a whole of life insurance policy in trust can help cover the cost.
Estate value: £500,000
Tax-free allowance: £325,000
Taxable amount: £175,000
Inheritance tax: 40% of £175,000 = £70,000
Cover needed: £70,000
