5 minute read
Inheritance tax is often treated as an “I’ll deal with it later” problem.
But for many families, it could quickly become a practical cashflow challenge sooner than expected. A valuable home, healthy investment portfolio, or sizable estate may look reassuring on paper, but when an inheritance tax bill arrives, where does the money actually come from?
Inheritance tax is usually due within six months of death, according to HM Revenue & Customs guidance, and interest may be charged on late payments. Yet estates are not always immediately accessible. Property may still need to go through probate, the legal process of administering someone’s estate after death, while investments and business assets can also take time to access or sell.
The number of families waiting more than 12 months for probate has almost tripled in five years, according to Ministry of Justice figures for England and Wales. This highlights the growing financial strain some families face when estates take months to administer but inheritance tax deadlines still apply.
This is where you could consider life assurance. Not simply as a protection product, but as a way to help create liquidity when it may be needed most.
What is life assurance?
Life assurance is a type of insurance policy that pays out a lump sum when someone dies. While many people associate it with mortgages or protecting young families, some later life policies are designed to help provide liquidity within an estate and reduce financial burden on loved ones.
That conversation is becoming more relevant for more families. HMRC collected a record £8.2 billion in inheritance tax receipts in the 2024/25 tax year, and rising property values are continuing to bring more estates into scope.
For some families, life assurance can help meet future inheritance tax liabilities without forcing the sale of assets at an already difficult time. Any potential future benefit should, however, be weighed against the cost of ongoing premiums, particularly alongside the goal of living well during retirement. Policies taken out later in life could carry significantly higher premiums than those arranged earlier.
Timing matters: inheritance tax bills often need to be paid quickly
Many people assume inheritance tax is simply deducted once an estate has been fully settled. In reality, the timing can be far more complicated.
If much of your wealth is tied up in property, investments, or business interests, your family may not have immediate access to enough money when tax becomes due.
For example, your home may represent significant wealth on paper, but that does not necessarily mean your family can quickly access funds if a property sale has not yet completed.
Research from Canada Life has also found that many over 55s underestimate the inheritance tax exposure attached to their estate, particularly where rising house prices are involved.
As a result, some families can find themselves asset-rich but cash-poor while trying to administer an estate.
Do you still need life assurance in retirement? Rethinking protection later in life
For many people, life assurance is arranged decades earlier and then rarely reviewed as financial priorities evolve over time.
But retirement can shift the purpose of cover rather than remove the need for it entirely.
Later life policies are often less about income replacement and more about helping your family manage future financial obligations more smoothly, particularly as inheritance tax exposure grows.
As pension and property wealth grows across the UK, more households are facing increasingly complex decisions about how to pass assets to the next generation. Analysis from the Institute for Fiscal Studies suggests that rising levels of retirement wealth are making later life financial planning far more complicated, particularly for those balancing pensions, property, tax, and family support.
The issue is becoming even more pressing as inheritance tax rules tighten. Under planned HM Revenue and Customs reforms due from April 2027, most unused pension funds will fall within the scope of inheritance tax, prompting many families to reconsider how wealth is structured and eventually transferred.
In retirement, life assurance can sometimes become less of a traditional protection product and more of a practical estate planning tool.
How life assurance may support inheritance tax planning
Depending on your circumstances, life assurance may play a role in wider estate planning discussions.
In some situations, it could:
- Provide funds that may help meet a future inheritance tax liability – A lump sum payout may help beneficiaries access funds without needing to quickly raise cash elsewhere.
- Potentially reduce pressure to sell assets quickly – This could provide greater flexibility if property, investments, or other assets cannot easily be accessed or sold.
- Support estate administration during probate – Additional liquidity may help executors manage certain costs and responsibilities while the estate is being administered.
- Help more wealth pass to future generations – In some circumstances, life assurance may help reduce the impact inheritance tax has on the overall value eventually passed on to beneficiaries.
It’s also worth discussing whether a life assurance policy should be written in trust with your adviser. A policy held in trust may sit outside your estate and pay out directly to your beneficiaries, potentially avoiding the probate process altogether.
Why planning ahead matters
One of the biggest challenges in inheritance tax planning is not always the size of the tax bill itself. It is whether enough accessible cash exists at the right time.
Without liquidity, executors may feel forced to sell investments, property, or family assets more quickly than planned in order to meet tax deadlines.
Importantly, life assurance is not suitable or necessary for everyone in retirement. Some families may already have enough accessible wealth to manage future inheritance tax obligations comfortably.
But where inheritance tax could become a concern, planning ahead may help you feel more prepared for difficult decisions and unforeseen circumstances down the line. And your plan could include life assurance.
The goal is not simply to reduce tax. It is to help give your family more options during an already emotional time.
If you would like to understand whether life assurance could play a role in your wider estate planning, speaking to one of our independent advisers could help you explore the options available to you.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
Premiums policies taken out later in life can be significantly higher than those arranged earlier, and cover may be subject to medical underwriting. The availability and cost of cover will depend on individual circumstances.