What is a Whole of Life Policy?
A whole-of-life policy is a type of personal life insurance with no end date. This means that it has a guaranteed payment upon death. Given the nature of these policies and guarantee of a future payout, the monthly premiums are understandably high. Particularly when compared to a standard Term Assurance plan with a defined end term. However, the increased cost with Whole of Life plans can be a great tool to help provide funds to pay for a specific need. This might include Inheritance Tax (IHT) planning, paying for funeral, gifting to family etc.
These plans can be set up one of three ways, dependant on specific circumstances and needs:
Single Life
Pays a lump sum following the death or terminal illness diagnosis of the life covered under the policy
Joint Life, First Death
Pays a lump sum following the death or terminal illness diagnosis of one of the two lives covered under the policy (first diagnosis/death).
Joint Life, Second Death
Pays a lump sum following the death or terminal illness diagnosis of both lives covered under the policy (second diagnosis/death).
How It Can Help with Inheritance Tax
With these policies placed into Trust from outset to a chosen trustees and beneficiaries, this removes the payout from the estate. It can therefore be used to pay any IHT bill due upon death, rather than the funds coming directly from the estate. This helps in protecting the legacy left behind. If the policy is not placed into trust, any payout would fall directly into the estate and subject to IHT.
This has become more prevalent since the 2024 Autumn Budget, where the Chancellor announced changes by moving pension assets into the estate making them subject to IHT from April 2027 onwards. With the freeze on the nil rate band and residence nil rate band remaining until 2030, this will likely have a big impact on estates with larger pensions. Previously these were seen as untouchable from an IHT perspective and a great estate planning tool. But from April 2027 the pension will form part of the overall estate and therefore subject the IHT. For example, if a pension is worth £1,000,000, the full 40% IHT rate could be applied, seeing a IHT bill of £400,000 due.
Estate planning is a complicated advice area and in-depth calculations are undertaken, which our experts at Bigmore Financial Planning can assist with. If you would like to understand Inheritance Tax to a greater degree, please review our Guide to Inheritance Tax.
Can This Be Funded By My Pension?
It is mentioned above that from April 2027 the value of any pension death benefit lump sum will form part of your taxable estate. This means the current rules allowing to leave any unused pension pots tax free will become liable to inheritance tax from 2027. For those with larger pension pots or estates over the tax-free allowances (£325,000 to £1,000,000 depending on the detail) this can lead to quite a large additional tax bill for their beneficiaries.
The simplest solution to this extra tax liability on the face of it would be to simply draw more from the pension pot. Yet with 75% of the pot liable for income tax, large withdrawals at a time could pay 40% or 45% tax, and even an equivalent 60% tax when losing your personal allowance at £100,000 pa. With large withdrawals potentially inefficient for income tax purposes, an alternative is to use some of the pension income to fund a whole of life insurance policy. If you do not need all the pension income to fund your personal expenditure needs, it can be a good solution versus drawing out larger pension lump sums at the highest rates of income tax.
Case Study Example
Let’s look at an example of how a Whole of Life policy can be used to pay an IHT bill and costs involved:
- Bill and his wife Caroline are both aged 72 with a property value of £1,000,000. Bill has savings of £100,000, with a pension pt of £400,000. As such, he has a potential IHT liability of £200,000. Therefore he might require a joint life, second death Whole of Life policy to cover this amount.
- Bill and Caroline, each receive a total of £40,000pa pension income. This comes via a combination of state pension and private pension. It covers income required for household expenditure.
- This level of cover will cost £393.39pm and if placed into trust, will pay out the full £200,000 tax free to their beneficiaries in order to pay the IHT liability.
- If Bill takes an extra £500pm gross from his pension, he’ll receive £400pm after tax and use this to pay the WOL premium.
If he instead drew £200,000 out from his pension to gift away, he’ll incur 45% tax on most the £200,000 drawing. This would also see him losing access to it from an income perspective. He also still has 7 years to go before the gift is IHT free.
Summary
With major changes to pension and inheritance tax rules coming in April 2027, reviewing your estate plan has never been more critical. If your current strategy relies on passing your pension tax-free, now is the time to act. A Whole of Life policy offers a useful, tax-efficient solution to protect your wealth and secure your family’s future. Though knowing whether this is the right move for you will require clear thought and considerations around your needs and your goal.
*Note: This article is intended for information purposes only and is not direct advice. Please speak with a qualified financial planner to assess your personal circumstances so you can make the best decision for you.
Article by Adam Nettleship
CEO Bigmore Associates
Chartered Financial Planner
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