Whole of life insurance, explained

Whole of life insurance covers you for the rest of your life. MoneyHelper puts it simply: these policies pay out no matter when you die, as long as you keep up with the premiums. The FCA describes whole of life as cover for the policyholder's lifetime that can be used to meet future liabilities such as Inheritance Tax.

Because the insurer knows it will almost certainly pay out one day, whole of life is typically more expensive than term cover. MoneyHelper also warns that if you live longer than expected, you could end up paying in more than you get out.

How it works

You agree a sum assured and pay premiums, usually monthly. Unlike term cover, there is no end date on the cover. As long as premiums are paid as the policy requires, the payout is made on death.

People generally use whole of life for one of three things:

• A known future cost, such as a funeral
• An expected Inheritance Tax bill, so that heirs have cash to pay it
• Leaving a set sum to family regardless of when death happens

Over-50s plans are a related product with no health questions and a fixed payout. They work differently enough to have their own guide.

Whole of life and Inheritance Tax

This is the use most people search for, so it is worth being precise about what the policy does. Whole of life cover does not reduce the tax. It provides money to pay it.

The key figures from GOV.UK:

• The standard Inheritance Tax rate is 40%, charged on the part of an estate above the £325,000 threshold.
• There is normally no Inheritance Tax on what you leave to a spouse or civil partner.
• Inheritance Tax must be paid by the end of the sixth month after death, and part of it usually has to be paid before the executors can get probate (called confirmation in Scotland).

That last point is the practical problem. An estate may owe tax before its own money and property can be released. A policy payout can give the family cash at that moment.

Why the trust matters

HMRC's manual is clear that if the person who died owned a policy on their own life, the proceeds form part of their estate and are taxable on death. Put simply, a policy meant to pay the tax would itself add to the bill.

Writing the policy in trust changes who owns the payout. MoneyHelper explains that property held in trust normally isn't counted in your estate when the Inheritance Tax bill is worked out. The trustees receive the money and hold it for the beneficiaries, who are often the same people who inherit the estate and face the tax bill. See life insurance in trust.

Premiums as gifts

When premiums are paid on a policy that someone else owns, such as trustees, HMRC treats each premium as a gift. That sounds alarming, but exemptions often cover it:

• Normal expenditure out of income. GOV.UK says regular gifts from income are exempt if you can afford them after normal living costs. HMRC's manual uses regular monthly premiums into a life policy written in trust as an example of a pattern of gifts that is exempt.
• The annual exemption. GOV.UK lets you give away £3,000 a year without it being added to your estate, with one year's unused allowance carried forward.

Whether the exemptions apply depends on your own income and spending, so this is a point to confirm with an adviser.

Joint cover and the second death

Because transfers between spouses or civil partners are normally free of Inheritance Tax, a couple's bill often falls on the second death. HMRC's manual describes joint life policies that become payable on an event after the first death, usually when the last joint policyholder dies. A joint whole of life policy set up this way, held in trust, is one structure people ask advisers about. See joint life insurance.

Scotland

The tax rules are UK-wide, but trust law is not. HMRC's manual has separate examples for policy trusts in Scotland because, in its words, the law is different there. Executors apply for confirmation from the sheriff court rather than probate. HMRC's examples show that some policy trusts can face ten-yearly Inheritance Tax charges, so the type of trust matters. A Scottish solicitor can check this.

What changes the cost

The same personal factors apply as for any life cover: age, health, family medical history, smoking, lifestyle, occupation and the amount of cover. MoneyHelper notes whole of life is typically more expensive than shorter-term policies.

Ask how the premium is set: whether it is fixed for life or can be reviewed, and if so how often. On a policy designed to last decades, that makes a real difference to the total you pay.

Claims

The FCA's November 2024 review found whole of life claims took 53 days on average from start to finish, though few firms measured this consistently. If the policy is in trust, the trustees claim. If not, the payout goes to the estate and may wait for probate or confirmation.

Refusals usually come back to the application. If an answer was wrong, the insurer may be able to reduce or refuse the claim. See declined life insurance claims.

What to check in your policy

• Sum assured, and whether it stays level or can increase
• Premium basis: fixed for life or reviewable, and when reviews happen
• Premium end date: whether premiums stop at a set age or continue for life
• Lives covered: single, joint first death, or joint second death
• Trust: whether the policy is in trust, the trust type and who the trustees are
• Who pays premiums: and whether this is recorded in a way that supports the gifts exemption
• Cash-in value: whether the policy has one and what happens if premiums stop
• Exclusions written into your policy
• Cover amount against today's estimate of the Inheritance Tax bill, if that's its purpose

When to talk to a regulated adviser

Using whole of life cover for Inheritance Tax involves tax, trust and insurance rules together. A regulated financial adviser can recommend whether a policy fits and how much cover is needed. A solicitor or tax adviser can deal with the trust and the estate, which GOV.UK also suggests for questions about tax-free gifts.

This guide is general information about how insurance works in the UK. It isn't advice and doesn't take your circumstances into account. Policies differ: your own policy documents are what count.