Whole of Life Policy vs Investing for Married Couples: Which Is Better for Inheritance Tax Planning?
Inheritance tax (IHT) planning for married couples often creates a false sense of security. Because assets can usually pass between spouses free of inheritance tax, many couples delay planning until later in life.
However, inheritance tax is often only deferred, not avoided.
For married couples with a known or likely IHT liability, a common question arises:
Is it better to invest money to cover inheritance tax, or to use a joint Whole of Life policy instead?
To answer this properly, both approaches must be compared using the same monthly cost, while accounting for tax, timing, and certainty, and crucially, the fact that inheritance tax is typically due on second death.
Why Inheritance Tax Planning Is Different for Married Couples
Most married couples will not pay inheritance tax on first death, as assets usually pass to the surviving spouse.
The inheritance tax issue typically arises on second death, when the combined estate passes to beneficiaries such as children.
This creates two key challenges:
- A potentially large tax bill becomes payable at once
- Beneficiaries may need to find liquidity quickly to settle the tax
The real planning question is not whether inheritance tax will arise, but how it will be funded when it does.
Two Common Ways Couples Plan for an IHT Liability
1. Investing to Cover Inheritance Tax
Some couples choose to invest money during their lifetime with the intention that the investment value will eventually be used to pay inheritance tax on second death.
Potential advantages
- Flexibility
- Access to funds during lifetime
- Exposure to long-term investment growth
Key risks
- Investments usually remain inside the estate
- Subject to 40% inheritance tax on second death
- Market volatility
- Longevity risk, because both individuals must live long enough for the strategy to work
2. Using a Joint Whole of Life Policy
A joint Whole of Life policy is designed to pay out a guaranteed lump sum on second death, which aligns directly with when inheritance tax is usually due for married couples.
When written in trust, the proceeds typically fall outside the estate, meaning they can be paid to beneficiaries free of inheritance tax.
This makes joint Whole of Life particularly effective for:
- Covering an inheritance tax liability
- Providing certainty on second death
- Ensuring immediate liquidity for beneficiaries
Case Study: Married Couple, Both Age 70
To compare both strategies fairly, let’s look at a realistic planning example for a married couple.
Case study assumptions
- Married couple
- Both age 70
- One male and one female
- Planning life expectancy used: age 85 for the male and age 87 for the female
- Anticipated inheritance tax liability on second death: £500,000
- Monthly amount available: £900
Case studies used are for illustrative purposes only.
Life Expectancy and Second Death Risk
Life expectancy is a critical factor for couples.
On average in the UK:
- Men live to around 79
- Women live to around 83
In many cases, the second death occurs much later, often into the late 80s or beyond. Any strategy relying on investing must therefore work over a longer timeframe, increasing exposure to both market risk and longevity risk.
This case study uses conservative planning assumptions to stress-test both approaches.
Option 1: Joint Whole of Life Policy Outcome
Using the £900 per month to fund a joint Whole of Life policy designed to cover the inheritance tax liability:
- Monthly premium: £900
- Estimated total premiums paid: £183,600
- Guaranteed payout on second death: £500,000
- Inheritance tax on payout: £0, assuming the policy is written in trust
Important point on timing
The £500,000 is paid on second death, whenever that occurs.
The couple does not need to live to life expectancy for the policy to be effective.
If both individuals were to die significantly earlier than expected, the full £500,000 sum assured would still be paid on second death.
This provides certainty from the outset and aligns precisely with when inheritance tax is due.
Option 2: Investing the Same Monthly Amount
Alternatively, the same £900 per month is invested instead.
This outcome assumes that:
- Both individuals live to their assumed planning life expectancy
- Contributions continue every month for the full period
- Investment growth averages 3 percent per year
Investment outcome
- Joint monthly investment: £900
- Assumed annual growth rate: 3 percent
- Estimated investment value by second life expectancy: £239,721
- Inheritance tax at 40 percent: £95,888
- Net amount received by beneficiaries: £143,833
If either death occurs earlier than expected, the investment value would be lower, while inheritance tax would still apply on second death.
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:
- Joint Whole of Life payout: £500,000, paid tax free on second death
- Post-inheritance-tax investment value: £143,833, achieved only if both individuals live to life expectancy
The difference
£356,167 more passed to the family using a joint Whole of Life policy
This highlights a fundamental distinction:
- Investing is dependent on time, market performance, and both lives lasting long enough
- Joint Whole of Life provides certainty exactly when inheritance tax is due
Why Timing Risk Matters Even More for Couples
When investing to cover inheritance tax, couples face compounded risk:
- Both individuals must live long enough
- Markets must perform as expected throughout
- The investment must still be sufficient after tax on second death
A joint Whole of Life policy removes these uncertainties by delivering a guaranteed, tax-efficient lump sum at the exact point inheritance tax becomes payable.
Joint Whole of Life: A Strategic IHT Solution for Couples
When structured correctly, joint Whole of Life insurance is not simply protection.
It is:
- A strategic inheritance tax planning solution for married couples
- A way to reduce or mitigate known tax liability
- A method of protecting beneficiaries from forced asset sales
- A source of certainty and liquidity on second death
Is Joint Whole of Life Right for Every Couple?
No. It should never be treated as a default solution.
Joint Whole of Life is typically most suitable for:
- Couples with a known or likely inheritance tax liability
- Those planning specifically for second death
- Families who want certainty over speculation
- Estates where liquidity will be required to settle tax
Final Thoughts
For married couples, inheritance tax planning is rarely about whether tax will arise. It is about when it will arise and how it will be funded.
In this real-world example, investing the same monthly amount leaves beneficiaries £356,167 worse off than using a joint Whole of Life policy once inheritance tax, longevity risk, and certainty are fully considered.
That alignment between timing, tax efficiency, and certainty is why joint Whole of Life remains one of the most effective tools in inheritance tax planning for married couples.
Speak to an Adviser About Inheritance Tax Planning for Couples
Inheritance tax planning for married couples is highly personal and depends on factors such as estate value, age, family circumstances, and how assets are intended to pass on second death.
If you are concerned about the potential impact of inheritance tax on your estate, speaking with a qualified financial adviser can help you:
- Understand your potential inheritance tax exposure
- Explore options to fund inheritance tax efficiently on second death
- Assess whether strategies such as joint Whole of Life insurance are appropriate for your circumstances
A conversation today can help provide clarity, certainty, and peace of mind for the future.
👉 Click here to arrange a no-obligation discussion with a financial adviser to review your inheritance tax planning.
The information provided is for informational purposes only and does not constitute financial advice.
Tax treatment varies according to individual circumstances and is subject to change.
Estate planning, Trusts and Tax planning, including Inheritance Tax Advice are not regulated by the Financial Conduct Authority.