Chancellor Rachel Reeves has frozen the £325,000 inheritance tax nil-rate band and £175,000 main residence band until 2031, dragging even more families into the net. She’s also planning to bring unused defined contribution pension pots into the net from April next year, hitting even more estates. Inheritance tax (IHT) raised £8.2billion for the Treasury last tax year, but the Office for Budget Responsibility (OBR) says that could exceed £14billion by the end of the decade.

Britons are responding by stepping up efforts to reduce their exposure, with gifting the most common option. Gifts made more than seven years before death usually fall outside inheritance tax (IHT). You can also pay regular gifts out of income, or set up trusts for children and grandchildren. There is another option that’s often overlooked but merits consideration, using a type of insurance known as a whole-of-life insurance policy. It won’t suit everybody, but could work for some.

Term insurance is the most popular form of life cover, where you pay premiums for a set period, say 25 years, and the policy pays out if you die in that time. If you die afterwards, you get nothing. With a whole-of-life plan, policyholders commit to paying premiums for life, with a guaranteed payout when they die.

There are nearly eight million whole-of-life policies in force, Financial Conduct Authority data suggests, while industry figures show a sharp rise in sales in early 2025, following a surge in IHT planning. Edward Durell, managing director at Cover Direct, said growing numbers are considering a whole-of-life insurance policy to provide money to cover an IHT bill when they die.

In practice, it acts like a dedicated “tax fund” for the family, he said. “It helps ensure the family home, investments or other assets don’t need to be sold just to settle the bill.”

Durell gives a simple example of how this might work. “Someone whose estate may face a £200,000 IHT bill could consider a whole-of-life policy for the same amount written in trust. Then when they die, the bill is covered.” This comes at a price though. A healthy 50-year-old would expect to pay £200 a month for £200,000 of cover, rising to £300 for a healthy 60-year-old. Term insurance is cheaper, with £200,000 cover costing around £63 a month at 50, but if they die after the policy term ends, their family gets nothing.

Naomi Greatorex, managing director at Heath Protection Solutions, has also seen a sharp increase in demand. She said whole-of-life assurance can either be set up on a single life basis, paying out on the death of the policyholder, or on a joint life basis paying out on the second death. Guaranteed premium policies offer fixed premiums for the duration of the plan. “Policies are often written into trust so that the proceeds fall outside the insured person’s estate and can be paid directly to the chosen beneficiaries,” Greatorex said.

Some families also use term assurance as part of their planning when making gifts. “A structured term assurance over seven years can provide cover during the period in which the gift could still fall back into the estate, if the donor dies in that time.” Whole-of-life policies can work for some families, but there are risks, warned James Baxter, founder of financial planning and investment management firm Tideway Wealth. “IHT planning is sensible, but fixed premium plans with no surrender values commonly being sold are inflexible and could turn out to be very expensive.”

Whole-of-life policies guarantee a payout on death but this exposes policyholders to longevity risk, as they must continue paying premiums for life. Premiums are calculated using life expectancy assumptions. “Given the inevitability of death, these policies are partly insurance, but mostly savings plans, with premiums being based on expected payouts.”

The danger is that the policyholder lives for many years after taking out the plan, which means continuing to pay in. “If a couple take out a policy aged 64 and one of them lives beyond 90, the effective return makes the policy a less attractive savings vehicle.” Baxter also warned of lapse risk. “Many families fail to keep up premiums, resulting in no pay out at all.”

It’s vital to check if your plan has a cash value, so you get something back if you stop paying premiums. On many policies, you don’t. People should check terms before signing, as they could cost more than expected, Baxter warned. Families should also work out whether they are likely to pay IHT in practice. While often described as the UK’s most hated tax, only about 5% of estates get hit.

Whole-of-life insurance remains a useful tool and can form part of a wider estate planning strategy alongside gifting and trusts. Other options, such as equity release lifetime mortgages, can also help reduce IHT exposure. This allows money to be taken from a property and gifted to heirs, but interest on the money borrowed rolls up over time, so careful planning is essential.

The key is to consider all options, weigh the pros and cons, and consider taking independent financial advice.