When planning for inheritance tax (IHT), many people assume that investing money over time will naturally build a pot large enough to cover the tax bill.
However, once inheritance tax is applied and the timing of death is considered, the outcome can be very different.
For individuals with a known or likely IHT liability, an important question arises:
Is it better to invest money to cover inheritance tax, or to use a Whole of Life policy instead?
To answer this properly, both approaches must be compared using the same monthly cost, while also accounting for tax, timing, and certainty.
Two Common Approaches to Covering an IHT Liability
1. Investing to Cover Inheritance Tax
This approach involves investing money during lifetime with the aim that the accumulated value will eventually be used to pay inheritance tax.
Potential advantages
- Flexibility
- Access during lifetime
- Exposure to long-term growth
Key risks
- Investments usually remain inside the estate
- Subject to 40% inheritance tax on death
- Market volatility
- Longevity risk, because the outcome depends on living long enough
Investment figures are often quoted assuming the individual lives to a specific age and continues investing throughout that period.
2. Using a Whole of Life Policy
A Whole of Life policy pays out a guaranteed lump sum on death, whenever death occurs. When written in trust, the proceeds typically fall outside the estate, meaning they are paid to beneficiaries free of inheritance tax.
This removes two major uncertainties:
- Market performance
- How long the individual lives
Case Study: Single Male, Age 72
- Single male
- Age 72
- Inheritance tax liability to cover: £500,000
- Monthly Amount Available: £1,400
- Planning life expectancy used: age 85
Case studies used are for illustrative purposes only.
Life Expectancy: Why Gender and Timing Matter
Life expectancy plays a crucial role in inheritance tax planning.
In the UK:
- Average male life expectancy is around 79 years
- Average female life expectancy is around 83 years
Women typically live around four years longer than men, which can significantly affect:
- How long investments need to run
- Total contributions made
- Exposure to market and timing risk
This example deliberately uses a single male case study. Importantly, the investment outcome only applies if the individual lives to age 85 and continues investing throughout.
Option 1: Whole of Life Policy Outcome
Using the £1,400 per month to fund a Whole of Life policy designed to cover the IHT liability:
- Monthly premium: £1,400
- Estimated total premiums paid: £218,400
- Guaranteed payout on death: £500,000
- Inheritance tax on payout: £0, assuming the policy is written in trust
Important points to consider with Whole of Life
✅ The £500,000 is paid whenever death occurs.
✅ The policyholder does not need to live to age 85. If death occurred two years after the policy started, the full £500,000 sum assured would still be paid on death.
✅ This provides immediate inheritance tax protection from day one.
Option 2: Investing the Same Monthly Amount
Alternatively, the same £1,400 per month is invested.
This outcome assumes the individual:
- Lives to age 85
- Invests every month for the full period
- Achieves the stated growth rate consistently
Investment outcome
- Monthly investment: £1,400
- Assumed annual growth rate: 3%
- Estimated investment value by age 85: £267,373
- Inheritance tax at 40%: £106,949
- Net amount received by beneficiaries: £160,424
If death occurs earlier, the investment value would be significantly lower, while the inheritance tax charge would still apply.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
The Key Comparison: Certainty Versus Time Dependency
When compared side by side:
- Whole of Life payout: £500,000, paid tax free whenever death occurs.
- Post-inheritance-tax investment value: £160,424, achieved only if the individual lives to age 85.
The Difference:
£339,576 more is passed to the family using a Whole of Life policy.
- Investing is time dependent and uncertain
- Whole of Life is immediate, guaranteed, and not dependent on lifespan
Why Timing Risk Matters in Later-Life Planning
When investing to cover inheritance tax, two things must both go right:
- The individual must live long enough
- Markets must perform as expected
A Whole of Life policy removes both uncertainties by delivering a guaranteed, tax-efficient lump sum whenever it is needed.
Whole of Life: A Strategic IHT Solution
When structured correctly, Whole of Life insurance is not simply protection.
It is:
✅ A strategic inheritance tax planning solution
✅ A way to ring-fence a known tax liability
✅ A method of protecting beneficiaries from forced asset sales
✅ A source of certainty in estate planning
Is Whole of Life Right for Everyone?
No. It should never be presented as a universal solution.
Whole of Life is typically most suitable for:
- Individuals with a known inheritance tax liability
- Clients later in life with limited time to plan
- Those who value certainty over speculation
- Estates where liquidity on death is essential
When inheritance tax is involved, focusing only on investment growth can be misleading.
The real question is:
How much will your family receive, and when?
In this example, investing the same monthly amount leaves beneficiaries £339,576 worse off than using a Whole of Life policy once inheritance tax, timing risk, and certainty are fully considered.
That certainty is why Whole of Life remains one of the most effective tools in inheritance tax planning.
Worried About the Impact of Inheritance Tax on Your Family?
Many families are unaware of how much inheritance tax could reduce the value of their estate until it is too late to plan effectively.
A tailored inheritance tax review can help you:
- Understand how much tax your estate may face
- Explore solutions designed to provide certainty and liquidity
- Put a plan in place that protects the value you pass on to your loved ones
👉 Click here to arrange a no-obligation discussion with a financial adviser to review your inheritance tax planning.
Tax treatment varies according to individual circumstances and is subject to change.
The information provided is for informational purposes only and does not constitute financial advice.
Estate planning, Trusts and Tax planning, including Inheritance Tax Advice are not regulated by the Financial Conduct Authority.