The Role of Life Assurance in Estate Planning

Life assurance often features in estate planning conversations as an afterthought — a product recommendation at the end of a meeting rather than a strategic component of the overall plan. For HNW individuals with complex, internationally dispersed estates, that is the wrong way to think about it. Used correctly, life assurance is a precision planning tool: it can fund an inheritance tax liability without forcing a sale of illiquid assets, provide immediate liquidity into a trust, bridge the gap between now and when a seven-year gifting programme completes, and ensure that family members receive support without waiting for a lengthy international probate process.

This guide sets out the key roles life assurance plays in estate planning, the types of policy used, and the specific considerations for internationally mobile families.

Why Life Assurance Belongs in Estate Planning

The problem life assurance solves in estate planning is straightforward: an inheritance tax liability (or other succession charge) is due on death, but the estate's assets may be illiquid, tied up in probate proceedings, or not easily divisible without destroying value. A property, business interest, or art collection cannot typically be turned into cash quickly and at full value to pay an IHT bill. Life assurance provides guaranteed liquidity at precisely the moment it is needed.

Beyond pure IHT funding, life assurance in estate planning can:

• Equalise an estate where some assets (the family home, business) pass to one child and other assets or insurance proceeds pass to another.
• Fund a buy-sell arrangement among business partners on death (shareholder protection).
• Protect a surviving partner's position where assets are locked in trust or in a company.
• Fund trust distributions without the trust needing to liquidate investments.
• Provide for a non-spouse partner who would not otherwise benefit from the IHT spouse exemption.
• Cover the IHT cost of a failed Potentially Exempt Transfer (PET) if the donor dies within seven years.

Types of Life Assurance Used in Estate Planning

Whole-of-Life Assurance

The most important product for estate planning purposes. As the name implies, a whole-of-life policy provides cover for the rest of the insured person's life — there is no expiry date. The policy pays out whenever death occurs.

Reviewable whole-of-life: premiums are reviewed periodically (typically every five or ten years) and may increase significantly with age. The initial premium is lower, but the long-term cost is less predictable.

Guaranteed whole-of-life: the premium is fixed throughout the policy. Premiums are higher initially but provide certainty. Recommended where long-term funding of the IHT liability is the objective.

For the proceeds of a whole-of-life policy to be outside the estate (and therefore not themselves subject to IHT), the policy must be written in trust. If the policy is held personally, the proceeds form part of the estate and are subject to IHT — defeating the purpose. Writing the policy in trust at outset is essential; retrospective trust creation is more complex.

Term Assurance Written in Trust

A level or decreasing term assurance policy covers the insured for a defined period. In estate planning, term assurance is often used to cover the IHT liability during a seven-year gifting programme. If the donor dies within seven years of making a PET, IHT may become due on the gift; a seven-year decreasing term policy provides the funds to meet this liability.

The policy is decreasing because the potential IHT charge on the gift reduces over the seven-year period (due to taper relief). A decreasing term policy aligns the cover with the declining liability.

Second-to-Die (Joint Life Last Survivor) Policies

Where IHT planning involves a married couple who are leaving assets to each other first (using the inter-spouse IHT exemption) and to children on the second death, a joint life last survivor policy provides cover on the second death — when the IHT liability actually arises. Premiums are typically lower than two individual policies because the policy pays only on the second death, which statistically occurs later.

Offshore Portfolio Bonds with Life Assurance Wrapper

Some offshore investment bonds are structured as whole-of-life policies for regulatory and tax purposes, even though their primary function is investment rather than risk coverage. The policy pays out a small life assurance "top-up" on death. These should not be confused with genuine whole-of-life assurance for IHT funding purposes — they serve a different planning function (income tax deferral and succession of investment assets).

Writing Life Assurance in Trust

This is the non-negotiable practical step that makes life assurance effective for estate planning. The mechanism is straightforward:

1. The policy is taken out on the life of the insured person.
2. The policy is assigned (or from the outset, placed) into a trust.
3. The trustees — not the insured — are the legal owners of the policy.
4. On death, the proceeds are paid directly to the trust and distributed to beneficiaries without forming part of the insured's estate.

Because the policy is held in trust:

• The proceeds are not subject to IHT.
• The proceeds do not go through probate — they are available to beneficiaries quickly, often within days or weeks, providing immediate liquidity while the rest of the estate is being administered.
• The insured can nominate specific beneficiaries or a class of beneficiaries (typically the same as the trust beneficiaries).

Trust structures for life assurance policies range from simple absolute (bare) trust forms — provided by insurers, appointing named beneficiaries — to discretionary trusts that allow flexibility over which family members benefit. A discretionary trust is generally preferable for flexibility, though there are IHT implications on significant gifts into trust that should be reviewed with a tax adviser.

Using Life Assurance to Fund IHT

The calculation is simple in principle:

1. Estimate the IHT liability on the current estate.
2. Estimate how much of the liability can be mitigated through existing reliefs (BPR, APR, gifts, trust planning).
3. The residual liability is the "IHT gap" — the amount that life assurance should fund.
4. Arrange a whole-of-life policy (written in trust) for the IHT gap.
5. Review the calculation regularly as the estate value changes and reliefs are applied.

A common mistake is purchasing life assurance for the full current IHT liability without accounting for reliefs already in place. Conversely, many families leave a residual liability uninsured because they assume their existing planning covers everything. A regular, systematic review — ideally annually — is the only way to keep the insurance aligned with the actual liability.

Adjusting for Inflation and Asset Growth

The IHT liability is based on the value of the estate at death. For families whose assets are growing significantly (through property appreciation, business growth, or investment returns), a fixed policy sum assured will become increasingly inadequate over time. Reviewable policies that can be increased on set dates, or renewable term policies, can address this — though medical underwriting at increase dates may be required.

The Premium as Normal Expenditure Out of Income

If the premiums are paid regularly from surplus income (rather than from capital) and the conditions for the "normal expenditure out of income" IHT exemption are met, the premiums themselves are exempt gifts. This avoids the premiums reducing the nil rate band or creating chargeable transfers. For high-earners with significant income and a large IHT exposure, this can be highly effective — the cost of the insurance is met by income that would otherwise have contributed to the estate's taxable value.

Life Assurance for Non-UK Resident Individuals

For internationally mobile clients, life assurance in estate planning raises additional considerations:

Medical Underwriting and Jurisdiction

Major UK life assurers will underwrite policies for UK nationals living abroad, subject to the country of residence and medical history. Some countries of residence are excluded (typically those with significant political risk or unstable healthcare systems). Premium loadings may apply for certain regions.

Offshore Life Assurance

International HNW clients may use offshore life assurance policies — typically issued from the Isle of Man, Guernsey, or Luxembourg — that are specifically designed for non-UK residents. These policies are often structured as portfolio bonds with a life assurance wrapper. For estate planning purposes, what matters is whether the policy qualifies as assurance under the relevant tax law, and whether the proceeds are structured to remain outside the estate.

Trust Jurisdiction

The trust holding the life assurance policy should be in a jurisdiction that is legally robust and practically capable of receiving the policy proceeds and distributing them to beneficiaries across different countries. Channel Islands trusts, Isle of Man trusts, and similar structures are common for UK nationals living abroad.

Double Tax Treaties and Estate Taxes

Where the insured is also subject to estate or succession taxes in their country of residence, life assurance proceeds held in an offshore trust may or may not be within scope of local estate taxes, depending on how the local law characterises trust assets. Local advice is essential.

Common Planning Errors

Not Writing the Policy in Trust

Probably the most common error. A whole-of-life policy held personally forms part of the estate and is itself subject to IHT. The proceeds that were intended to pay the tax bill are instead taxed at 40%. Always write assurance policies in trust from the outset.

Underinsuring Due to Outdated Reviews

The IHT liability changes as the estate grows, as reliefs are applied, and as the nil rate band remains frozen. A policy arranged five years ago may significantly underinsure the current liability. Annual review is essential.

Ignoring Premium Affordability in Later Life

Reviewable whole-of-life policies can become unaffordable as the insured ages, particularly if health deteriorates. Long-term affordability must be modelled before selecting the policy type, and guaranteed premiums should be considered for larger, longer-term commitments.

Failing to Coordinate with the Will

The proceeds of a life assurance policy held in trust pass according to the trust deed, not the will. Ensure the trust's distribution provisions are consistent with the overall estate plan and that the correct beneficiaries are named.

How Global Investments Can Help

At Global Investments, we integrate life assurance planning into the broader estate planning framework for internationally mobile HNW clients. We help clients to:

• Quantify the residual IHT liability after all planning reliefs are applied.
• Source appropriate whole-of-life, joint life, and decreasing term assurance policies from reputable insurers for UK and international clients.
• Ensure policies are written into the appropriate trust structure for the client's circumstances.
• Model the premium as normal expenditure out of income where applicable.
• Review and update assurance coverage annually as the estate plan evolves.
• Coordinate offshore life assurance solutions for non-UK resident clients.

Life assurance in estate planning is not about avoiding tax — it is about ensuring that your family receives what you intend, without being forced to sell assets under pressure, without losing value to a disorganised probate process, and with the liquidity they need at the hardest of times. All information in this guide reflects the position as of 2026. Tax treatment depends on individual circumstances and rules may change; please seek professional advice tailored to your situation.