Protecting Your Family, Wealth and Future: Protection Insurance, Wills, Trusts and Inheritance Tax Planning in 2026/27

October 8, 2026 — David Gregory, Chartered Financial Planner

Financial security is not only about what you build but how well it is protected and where it goes next. This guide explains how life cover, critical illness cover and income protection fit together, and how Wills, Lasting Powers of Attorney, trusts and lifetime gifts can pass wealth on efficiently ahead of the April 2027 pension changes.

Why does protecting your family start with protecting your income?

Your income is the engine of your financial plan. It pays the mortgage, the childcare and the bills, and it funds the pension contributions and savings that build your future. If serious illness, injury or death interrupts it, the effect can spread through every part of your family's finances.

A short dip in earnings is usually manageable. A long or permanent loss is much harder. Savings can tide you over for a while but were rarely meant to replace a salary for years. Selling investments at the wrong moment can undo long term plans. Statutory Sick Pay and most employer schemes are modest and time limited. That is why protection deserves a place alongside saving, investing and pension planning rather than being an afterthought.

The simplest test is to ask: if my income stopped tomorrow, could my family stay in our home, keep our standard of living and support our children through the stages ahead?

How much protection do I actually need?

There is no standard answer, because priorities differ between households. A family with a new baby has very different needs from a couple whose children have left home. A good review starts with what you already have:

• Employer benefits such as death in service (often a multiple of salary), group income protection and sick pay.
• Existing policies, including any cover attached to your mortgage.
• Savings and investments you could realistically draw on.
• Pension death benefits and who they are nominated to.

Then work out the gap: the mortgage or rent, ongoing household costs, childcare and education, and the less obvious costs such as home adaptations, private treatment or a partner reducing their hours to care for children. Remember that employer cover usually ends when you change jobs, so it should not be your only protection.

Protection needs change whenever life does. Marriage, a new baby, a house move, a pay rise, starting a business or children becoming independent are all moments to review your cover.

What is the difference between critical illness cover and income protection?

They are often confused, but they solve different problems.

• Critical illness cover pays a tax free lump sum when a condition meets the policy's definition and any severity or survival requirements, subject to exclusions. Covered conditions typically include many cancers, heart attacks and strokes. You can use it however you need: clearing or reducing the mortgage, paying for treatment or adapting your home. For 2026/27, HMRC treats payments from qualifying critical illness policies as not taxable as income.
• Income protection pays a regular monthly income if illness or injury stops you working, after a waiting period you choose (the deferred period). Benefits are typically a proportion of your earnings rather than your full salary, and personally owned policies paid from taxed income generally pay out tax free.

Income protection can cover a wider range of illnesses and injuries than critical illness cover, but claims depend on the policy's incapacity definition, exclusions and payment limits. Depending on the policy, it can pay until you return to work, the end of the term or retirement age. Matching the deferred period to your employer's sick pay keeps premiums down. The definition of incapacity matters too: an "own occupation" definition assesses whether you can do your own job, which is generally broader than a definition based on your ability to do any work or suited work. Our guide to critical illness cover goes into more detail.

How much life insurance do I need, and should it be written in trust?

Life assurance gives your family a lump sum or a regular income if you die during the term. The right amount usually covers the mortgage, a sum to replace your income for the years your family would depend on it, and any specific goals such as school fees. Family income benefit, which pays a monthly income rather than a lump sum, can be a cost effective way to replace earnings.

Ownership matters as much as the amount. If you own a policy on your own life and it pays into your estate, the proceeds can be subject to Inheritance Tax at 40% and delayed until probate is granted. Writing the policy in trust can:

• get the money to your family quickly, without waiting for probate;
• often keep the proceeds outside your estate for Inheritance Tax; and
• give you control over who benefits.

Trusts have their own rules and tax treatment, so the type of trust should suit your circumstances. Business owners should also consider relevant life cover, key person cover and shareholder protection, which can be funded by the company.

How does Inheritance Tax work in 2026/27?

Inheritance Tax is charged at 40% on the value of an estate above the available allowances. For 2026/27:

• The nil rate band is £325,000 per person.
• The residence nil rate band adds up to £175,000 when your home passes to children or grandchildren. It is reduced by £1 for every £2 your estate exceeds £2 million.
• Unused allowances can pass to a surviving spouse or civil partner, so a couple can pass on up to £1 million without Inheritance Tax where all the conditions are met.
• Leaving at least 10% of your net estate to charity can reduce the rate on some assets from 40% to 36%.

The big change is pensions. For deaths on or after 6 April 2027, most unused pension funds and death benefits will be included in your estate. For many families who saw their pension as a tax efficient way to pass on wealth, this changes the planning. Read our explainer on the 2027 pension Inheritance Tax rules for the detail.

Why are a Will and Lasting Powers of Attorney important?

Without a valid Will, the intestacy rules decide who inherits, and they may not reflect your wishes. An unmarried partner, for example, has no automatic right to inherit. A Will lets you choose who receives what, appoint executors you trust, name guardians for young children and include trusts where you want more control.

A Will should be reviewed after marriage, divorce, the birth of a child, a house move or a significant change in wealth. It also needs to work alongside your pension nominations and any life cover in trust, because those assets often pass outside the Will.

Lasting Powers of Attorney are just as important and often overlooked. In England and Wales there are two separate types. A property and financial affairs LPA can be used, with your permission, while you still have capacity, as well as if you lose it. A health and welfare LPA only applies when you lack the capacity to make the relevant decision yourself. Without them, your family may need to apply to the Court of Protection, which is slower and more expensive. Our sister business Legacy Lines specialises in Wills and Lasting Powers of Attorney.

When does a trust make sense?

A trust is a legal arrangement in which trustees hold assets for the benefit of beneficiaries, following the terms you set. Trusts can be useful where you want to provide for children who are too young to manage money, protect assets for a vulnerable beneficiary, keep wealth in the family across generations or place life cover outside your estate.

A trust is a planning tool, not a goal in itself. Different trusts carry different tax treatment, some can give rise to tax charges during their lifetime, and trustees take on real responsibilities. The decision should flow from what you want to achieve. Our trust and estate planning guide explains the main types.

How can parents and grandparents help the next generation tax efficiently?

Many families want to see their wealth make a difference now, helping with a first home, education or childcare, rather than waiting for an inheritance. For 2026/27 the main Inheritance Tax gift exemptions are:

• Annual exemption: £3,000 a year, with one year's unused allowance able to be carried forward.
• Small gifts: up to £250 per recipient, per year, to people who have not received another exempt gift from you.
• Wedding or civil partnership gifts: up to £5,000 to your child, £2,500 to a grandchild and normally £1,000 to another person.
• Normal expenditure out of income: gifts with no set upper limit, provided they form part of your normal expenditure, are made out of income rather than capital and leave you with enough income to maintain your usual standard of living. Good records are essential.

Larger gifts to individuals are generally potentially exempt and fall outside your estate if you survive seven years. If you die within seven years, taper relief can reduce the tax on a gift made three to seven years before death, but only where the gift itself exceeds the available nil rate band. Gifts where you keep a benefit, such as giving away your home but continuing to live in it rent free, usually do not work.

Gifts should never compromise your own security, and they should be coordinated with your Will. If one child receives £100,000 towards a house deposit and you intend the others to be treated equally, your Will needs to reflect that. Our family succession planning guide covers how to have these conversations.

What should I do next?

Frequently asked questions

Is a critical illness payout taxable in the UK?

Payments from qualifying critical illness policies are generally not taxable as income. Any payout that you receive and still own at death can form part of your estate for Inheritance Tax.

Is income protection worth it if I get sick pay from my employer?

It can be. Employer sick pay usually reduces or stops after a set period, while income protection may continue until you return to work, the policy ends or you reach retirement age, depending on its terms. Whether it is worthwhile depends on your employer benefits, savings, outgoings and budget. Setting the deferred period to start when your sick pay ends can keep premiums lower.

Why should I put my life insurance in trust?

A trust can pay the money to your family without waiting for probate and, in many cases, keeps the proceeds outside your estate for Inheritance Tax. It also lets you control who benefits.

How much can I leave without paying Inheritance Tax in 2026/27?

Each person has a £325,000 nil rate band, plus up to £175,000 residence nil rate band if a home passes to direct descendants. A married couple or civil partners can pass on up to £1 million where all the conditions are met.

Will my pension be subject to Inheritance Tax?

For deaths on or after 6 April 2027, most unused pension funds and death benefits will be included in your estate for Inheritance Tax purposes under the Finance Act 2026. Pension funds passing to a surviving spouse or civil partner should still benefit from the spouse exemption, and the rules for each scheme are worth checking.

Do I need a Lasting Power of Attorney if I am married?

Yes. In England and Wales, marriage alone does not give your spouse legal authority to manage your finances or make health and welfare decisions for you if you lose capacity. That authority comes from a registered Lasting Power of Attorney or a court order. Most people make two separate LPAs, one for property and financial affairs and one for health and welfare. Scotland and Northern Ireland have their own arrangements.

This article is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although every effort has been made to provide accurate and timely information, there is no guarantee that it is accurate on the date it is received or that it will remain accurate in the future. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of taxation, and reliefs from taxation, are subject to change, and their value depends on individual circumstances. Unless otherwise stated, figures relate to the 2026/27 tax year. Protection policies have terms, conditions and exclusions, and cover is subject to underwriting. A pension is a long term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments can go down as well as up, and you may get back less than you invested. The Financial Conduct Authority does not regulate estate planning, trusts, Will writing, Lasting Powers of Attorney, cash flow modelling or tax advice.