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Inheritance Tax on Life Insurance: All You Need to Know

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Inheritance Tax on Life Insurance: All You Need to Know Image

When you die, your loved ones may have to pay inheritance tax on your life insurance policy. This occurs if your estate is worth over a certain amount.

In this easy-to-follow guide, our expert team is at your service. We will explain everything that you need to know about inheritance tax on life insurance. If you are exploring your options, our aim is to help you make informed decisions to benefit both you and your loved ones.

For a straightforward and hassle-free way to compare life insurance, nowsure is the answer.

Get a free quote today in just three easy steps.

What is inheritance tax on life insurance?

Your estate is everything owned by you at the time of your death. Including money in a bank or building society, shares, property, and personal possessions (e.g., cars and jewellery). Your life insurance is also part of your estate. If the total value of your estate is over the £325,000 threshold, your life insurance will be liable for inheritance tax. 

But, there are two exceptions to this rule:

If you leave your home to your children or grandchildren (and your home is worth less than £2 million). They could benefit from an inheritance tax-free threshold of up to £500,000. This is known as the ‘residence nil-rate band’.


If you leave anything to your spouse or civil partner. They will not have to pay any inheritance tax, even if it is above the tax-free threshold. Married couples and people in civil partnerships can also combine their £325,000 thresholds. This effectively doubles the ‘nil-rate band’. This means there would be no inheritance to pay on estates valued up to £650,000. 


Do I pay inheritance tax on life insurance? 

If you put your life insurance in trust it will no longer be part of your legal estate. This means that your loved ones can benefit from a full tax-free payout.

A trust is a legal arrangement that passes ownership of your life insurance policy to the people that you name as your trustees. As the policy would no longer legally belong to you, it is not liable for inheritance tax. The benefits of putting your life insurance policy in trust include:

– The money from your policy goes directly to your loved ones.

– There is often a faster payout because your policy will not face probate.


If you think putting your life insurance in trust might be the right decision for you, your insurance provider will help you with the process. It is best to do this as soon as you take out your policy.

It is important to bear in mind that once a policy is in a trust, it usually cannot be changed.  Think carefully about whether putting your policy in a trust is your best option. Seek financial advice if necessary.

Will my partner have to pay inheritance tax on life insurance if we live together?

If you live with your partner but you are not married, you will not receive the same exemption from paying inheritance tax on life insurance as married couples and civil partners.

For this reason, putting your life insurance in trust could be a good option for you if you are part of an unmarried couple. If your life policy is not in a trust, any payout will be part of your estate. This means that your partner may have to pay inheritance tax on anything over £325,000.

This remains the case if you are unmarried and have a joint life insurance policy. Although the payout will go to your partner in the event of your death, it will be considered part of your estate for inheritance tax purposes.


Can life insurance be used to cover inheritance tax?

You can use a whole-of-life insurance policy to help pay an inheritance tax bill. However, there may be costs involved in doing this.

Your family would be able to use the life insurance payout to pay any owed inheritance tax without having to dig into your savings or sell your property or possessions.

A whole-of-life policy guarantees that your loved ones will receive a lump sum payout whenever you die. This is different to a term insurance policy, which only pays out if you die during the duration of the policy.

Whether a whole-of-life policy or a term insurance policy would be best for you depends on your own personal circumstances. This includes the level of cover that you need and your budget. You can find out more about term life insurance policies here.


Inheritance tax on life insurance FAQs

Do I have to pay more for writing my life insurance in trust?

You will not have to pay more for your policy if you decide to put it in a trust. It is usually a straightforward process that involves filling in some paperwork which is prepared by your insurance provider and submitting the details of your trustees.

It might be wise for you to hire a financial adviser who can explain the process to you. They could also help you to understand how different trusts work.

Can I reduce the inheritance tax rate I pay?

You can cut the rate of the inheritance tax payable on your estate to 36% (rather than 40%) if you leave at least 10% of the net value of your estate to charity. The net value of your estate is the total value minus any outstanding debts that you have. 

Do I have to pay Insurance Premium Tax on my life insurance premiums?

No – most long-term insurance, including life insurance, is exempt from paying Insurance Premium Tax.



Find an affordable life insurance policy that suits you with nowsure

At nowsure, we make life insurance simple. We provide clear explanations and unbiased support to help you choose a policy that is right for you.

We go above and beyond to provide insurance solutions that are tailored to your needs, doing all of the hard work so that you do not have to. With a 97% customer satisfaction rate, it is no wonder we are one of the UK’s most trusted life insurance providers.

Get started with our affordable life insurance policies today for peace of mind that your loved ones will be financially looked after when you are no longer around.

Request a free callback or contact us directly at 0800 033 4187.