Life insurance is one of those things we all know we “should” sort out, but it’s easy to kick into the long grass. The trouble is, if it’s done wrong (or not at all), it can leave families with debts, delays, and — ironically — an even bigger Inheritance Tax bill.
1. The basics (and the most common mistake)
- Life cover is designed to give your loved ones cash when you die — either to clear debts, replace income, or cover tax bills.
- The classic mistake: not writing the policy in trust.
- If it’s in trust: the payout usually sits outside your estate. The trustees can access it quickly, without waiting for probate, and there’s no IHT.
- If it’s not in trust: the payout swells your estate. That can tip you over the nil-rate band, create a tax bill, and hold things up until probate is granted.
- We’ve seen estates wait months for money that could have been released in days, just because no one ticked the “trust” box.
2. Mortgage cover ≠ life cover (and it can quietly lapse)
- Many people take out life cover with their mortgage. Years later, the mortgage is gone but the policy has been cancelled or reduced. The family assumes they’re covered — but they’re not.
- Even worse: some policies are tied directly to a specific mortgage. When you remortgage, the old policy is cancelled, and unless you take a new one, you’re suddenly uninsured.
- Practical point: Don’t assume “we sorted this when we bought the house” means you’re still covered. Check what’s actually in place.
3. Business owners: protection for more than the family
If you’re a business owner, life cover isn’t just about your family — it’s about your partners and staff too.
- Shareholder protection: Policies linked to cross-option agreements can fund buyouts, so your family gets cash and your co-owners keep control.
- Key person cover: If the business depends on you (or a colleague), insurance can give the company breathing space to hire and stabilise if someone dies unexpectedly.
Again, these policies only work properly if the agreements and trusts behind them are kept up to date.
4. “The wrong person gets the money” — nomination fails
Life insurance isn’t like pensions: the insurer pays out to whoever legally owns the policy, or the estate if no trust is in place. We’ve seen payouts accidentally land with an ex-spouse because the policy wasn’t updated after divorce. Not a great look at the funeral.
5. Cover vs reality (is it enough?)
- If your family would face a big IHT bill, is there enough cover to pay it without a fire sale of assets?
- If your mortgage is paid off, is the cover still necessary — or would the premiums be better redirected into other planning?
- If your policy is “decreasing term” (linked to a mortgage balance), does it still match your needs?
6. IHT safety nets — the joint life “just in case” policy
This is a practical option I often raise with clients in their early 50s who have built up a valuable IHT estate but aren’t ready to give assets away or give up the income they produce.
If a married couple has “everything to spouse” Wills, IHT is usually only due on the second death. That’s the point when a large tax bill can suddenly land.
An “IHT joint life second death” policy can be set up to cover the expected liability. In practice:
- For a fit, healthy couple, the premiums are often relatively low.
- The reality is, many of these policies never pay out — but they’re a safety net for the unexpected.
- This isn’t IHT planning (it doesn’t reduce the bill) — but it can buy peace of mind and time for longer-term planning.
7. Modern quirks
- Joint life policies: Often pay out on the first death, not the second — make sure you know which you’ve got.
- Critical illness add-ons: Useful, but they don’t cover everything. Don’t assume they’re a replacement for life cover.
- Old endowments: Some are worth keeping, others not — but don’t let them lapse unnoticed.
Practical tip: Dig out your life policies. Check: (1) is the cover still enough, (2) is it in trust, and (3) do the people named still match your wishes?
Call to action: We can’t tell you what policy to buy, but we can tell you whether your cover will sit inside or outside IHT, and whether it lines up with your wider estate plan. If it doesn’t, we’ll flag it so you and your adviser can fix it.
Back to You are not Immortal – a practical guide to a delicate topic – IHT
