Taking out a life insurance policy specifically to cover the inheritance tax (IHT) liability is indeed a common and straightforward way to protect your estate. Here’s a closer look at the advantages and disadvantages:

Advantages:

1. Preserves the Estate: A life insurance policy provides your beneficiaries with a lump sum to pay the IHT, ensuring they don’t have to sell or dip into the estate assets to settle the tax bill. This helps preserve valuable assets such as property, investments, or businesses.

2. Immediate Funds for IHT: The policy payout occurs shortly after death, ensuring there is liquid cash available to meet the tax liability, which is typically due within six months of death. This avoids delays or the need for emergency asset sales.

3. Simplicity: Unlike complex trust structures or other estate planning tools, a life insurance policy is relatively simple to set up and does not require ongoing management. It provides a clear, straightforward solution for covering the IHT bill.

Disadvantages:

1. Cost: The cost of the policy will depend on factors such as your age, health, and the amount of cover you require. For older individuals or those with pre-existing health conditions, premiums can be high, making this a costly option.

2. Increasing Costs Over Time: As you age, premiums may increase, especially if the policy is not a fixed-term or whole-of-life policy. If you live for many years after taking out the policy, the total cost of premiums can become significant.

3. Amount of Cover Required: Accurately projecting your IHT liability can be challenging, particularly if the value of your estate fluctuates over time. You may need to regularly review the policy to ensure it provides sufficient cover.

While this method is simple, it is essential to weigh the costs and consider alternative or additional estate planning tools, such as trusts, to achieve the most tax-efficient outcome for your beneficiaries.