Many people don't realise that insurance payouts — including life insurance, critical illness cover, and accident policies — can significantly increase the value of their estate for Inheritance Tax purposes.
In 2026, with the IHT nil-rate band frozen at £325,000, even a modest estate combined with an insurance payout can push families over the threshold. For example, a home worth £280,000 plus a £100,000 life insurance policy creates an estate of £380,000, attracting IHT on £55,000.
The key to avoiding this is placing your insurance policies into Trust. When a policy is held in Trust, the payout is made directly to the trustees for the benefit of your chosen beneficiaries, bypassing your estate entirely.
Different types of Trust are suitable for different policies. A bare Trust is the simplest option for life insurance, while a flexible Trust may be more appropriate for larger sums or complex family situations.
It's important to note that employer death-in-service benefits can also affect your estate value. In 2026, many employers offer death-in-service cover of 3-4 times annual salary. For someone earning £50,000, this means an additional £150,000-£200,000 in the estate.
We recommend writing a separate expression of wishes for your death-in-service benefit and reviewing it regularly, especially after life changes such as marriage, divorce, or the birth of children.
At Castle Family Legal, we can help you structure your insurance arrangements to minimise IHT and maximise what your family receives. Get in touch for expert advice.
