A record rise in inheritance tax (IHT) receipts is driving more families to take out whole of life insurance policies, but those who live into their 80s risk paying far more than they expect, a wealth expert has warned.
Inheritance tax raised £8.2bn in 2024–25, up from £7.5bn the previous year, according to HMRC. The Office for Budget Responsibility (OBR) forecasts the annual take will rise to £8.7bn next year and could exceed £14bn by the end of the decade.
Frozen thresholds and rising property values have steadily widened the tax net. The £325,000 nil-rate band has been fixed since 2009 and remains frozen until 2028. Further changes announced by Chancellor Rachel Reeves - including bringing unused pension pots into the scope of inheritance tax from 2027 - are expected to increase liabilities further.
Against this backdrop, whole of life insurance has become an increasingly common way to pre-fund a future 40% IHT bill.
Financial Conduct Authority (FCA) data showed there were around 7.9 million whole of life policies in force in the UK in 2023, making it one of the largest segments of the protection market.
While overall new protection sales have been mixed, industry data indicates that underwritten whole of life policies saw sharp year-on-year growth in early 2025 as inheritance tax planning activity increased.
But James Baxter, founder of financial planning and investment management firm Tideway Wealth, said the structure of the policies leaves households exposed to longevity risk.
"The principle of planning for inheritance tax is sensible, but fixed premium plans with no surrender values commonly being sold are inflexible and could turn out to be very expensive," he said.
Whole of life policies guarantee a payout on death in exchange for lifelong premiums. However, 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," James Baxter continued. "If a couple take out a policy aged 64 and one of them lives beyond 90, the effective return drops below risk-free rates, making the policy a less attractive savings vehicle.
"Furthermore, many families fail to keep up premiums, resulting in no payout at all," he continued.
While fewer than 5% of estates currently pay inheritance tax, that proportion is expected to rise as fiscal drag intensifies.
"People should ensure that they understand these policies before signing, as it could cost them more than they realise," he said.
