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What is whole of life insurance?

Whole of life insurance explained

Whole of life insurance, sometimes known as whole of life assurance, is a type of life insurance. It will pay out a cash lump sum to your dependants when you die. However, rather than being restricted to a certain time frame like level term life insurance, a whole of life insurance policy will pay out no matter when you die.

Life assurance or life insurance?

While the terms life assurance and life insurance are used almost interchangeably, they are actually quite different. 

Assurance is designed to protect against something that will happen. Insurance, on the other hand, protects you against an event that might happen.

Whole of life insurance, which protects you until you die, can be called life assurance, as that will happen. 

Level term life insurance, which only covers you for a set period of time, is life insurance, as you may not die during its term.

How does whole of life insurance work?

Whole of life insurance works in a similar way to level term life insurance. You take out a life insurance policy that specifies the amount of money you would like paid to your dependants when you die. You then pay a fixed premium to your provider every month (or annually). 

However, while a level term assurance policy covers you for an agreed period, such as 25 years, a whole of life policy continues to run until you die.

There are three main types of whole of life insurance:

Standard whole of life insurance

With standard whole of life insurance, otherwise known as balanced or non-profit whole of life insurance, your premiums are balanced out over your lifetime. This means the insurer has set it high enough to stay the same throughout your lifetime. 

Premiums are guaranteed to stay the same, no matter how old you get and what happens to your health. When you die, your insurer will pay out a fixed cash lump sum. 

With-profits whole of life insurance

With this type of policy, your insurer invests your premiums each month into the insurance company’s with-profits fund. This is pooled with other people’s premiums and invested into shares, property, bonds and cash, and forms a pot of money that will be your beneficiaries’ payout. You get your share of the fund’s profits each year, which is added to your policy as annual bonuses.

With-profits policies will usually specify a minimum payout on death. Anything above this will depend on how well the with-profits fund has performed, so your dependants could end up with a larger or smaller lump sum.

Unit-linked whole of life insurance

With a unit-linked whole of life insurance policy, your cover is linked to an investment fund and your insurer invests your monthly premiums in the stock market. However, in this case the premiums are based on the size of the payout you would like, so the larger the lump sum required, the larger the monthly premiums. 

With unit-linked policies, a minimum payment on death is usually specified. Anything above this will depend on the value of the funds you’re invested in. The insurer will regularly review how well your investment is doing to see if it is on track. They may suggest increasing your premiums, therefore, if the investments are deemed to be under-performing, or reduce the size of the cash payout as a result.

Can I cash in a whole of life policy early?

With any of the whole of life insurance options you can choose to surrender the policy early. However, the fund is likely to be subject to hefty penalties or charges, and could end up considerably smaller than the amount you paid in premiums. 

How much does whole of life insurance cost?

Whole of life policies are a more expensive form of life insurance, as insurers know they will have to pay out at some point. Premiums are significantly more expensive than level term insurance as a result. 

However, some whole of life policies do not require you to pay your premiums until you die. Instead, you pay for a certain number of years, or until a certain age; typically 90. After this point your cover continues, but you make no further payments. 

You should therefore be confident that you will be able to make the payments, even when you have retired, as the policy will be cancelled if you miss any.

Do I need whole of life insurance?

The first thing to point out is that life insurance pays out to your beneficiaries when you die.  If you are single, with no one relying on you financially, you probably do not need life insurance.

You may also already have some life insurance or death in service cover through your employer, which will pay out a multiple of your salary, should you die while an employee. For example, if you earn £25,000 a year and you have death in service benefit worth 4 times your salary, you would be covered for £100,000.

It is therefore worth checking to see if you are covered and if so, for how much. Bear in mind that some firms only offer these benefits to those in the company pension scheme, so it can be worth enrolling if you have not already done so. 

Benefits of whole of life insurance

Is whole life insurance worth it?

Whole of life insurance is much more expensive than level term cover. Think carefully about why you need life insurance as this can help you choose the most appropriate policy. 

Whole of life policies often tend to appeal to those who hope to earn a higher payout for their dependants by linking life insurance with investing. Some people take out a whole of life policy in order to cover their inheritance tax bill when they die, and some use it to provide for funeral expenses.

Do you wish to provide an income for your partner and/or children, or ensure they can pay off the mortgage if you were to die? If so, a level term life insurance policy that runs until your children have finished full time education could be a much cheaper option.

Whole of life insurance comparison

If you think this type of policy is right for you, you will need to shop around for the best policy. Insurance companies, banks, and comparison sites, such as Uswitch can also be useful places to search for the best whole of life insurance quotes. 

Be aware that life insurance quotes are calculated by considering factors, such as your age, medical history and whether you smoke - you may be asked to take a medical.

Younger policyholders will pay less for their cover as they’re seen as lower risk. Riskier lifestyles equal higher premiums, and smokers will pay more than their non-smoking friends. 

Ensure you disclose anything that might be relevant when taking out the policy, as insurers will refuse to pay out for any pre-existing issues they weren’t informed about.

Being in good health equals lower premiums and you might be asked to take a medical check-up before an insurer will cover you. Getting in shape, drinking less and giving up smoking before applying could therefore earn you lower premiums, as well as improve your health.

Whole of life insurance quotes for seniors

Insurance brokers

If you are over 65, or have any pre-existing medical conditions, it can be worth speaking to a specialist insurance broker. While they may charge a fee, they may be able to advise you as to which is the best whole of life insurance provider for your particular situation.

Independent financial advisers

Alternatively, it can be worth paying for advice from an independent financial adviser. Not only are advisers able to assess all of your existing insurance policies to see what exactly is needed, they will often have access to more competitive products.

Buying a whole of life insurance policy

When you are happy you have found the best life insurance policy that meets your needs, make sure you read the small print carefully. 

The Financial Ombudsman Service deals with grievances regarding financial products. It states that the majority of the complaints it receives about whole of life insurance involve customers receiving policies that were not suitable for their circumstances and conditions. Some customers have only needed cover for a limited time, and others didn't understand that their plans would be under regular review, meaning their premiums could increase.

It’s essential to know what is and isn’t covered by your policy, how much your premiums will be, and to get anything you are unclear about explained by the provider, or your broker/adviser.

Remember, you have the right to change your mind within 30 days, during which time the provider must offer you a full refund.

Inheritance tax (IHT)

It’s worth remembering that the taxman can seize our cash, even when we die, in the form of inheritance tax.

If you arrange with your insurer for your life insurance to be paid directly to your spouse/registered civil partner (or a charity) inheritance tax will not normally be charged, provided they live in the UK.

However, if nothing is arranged, your life insurance will form part of your estate. And this is where inheritance tax rears its ugly head: If your estate totals more than £325,000, anything over this threshold is taxed at an eye watering 40 percent.

So, if you had a life insurance policy worth £500,000 making your total estate worth £800,000, your beneficiaries could pay IHT on £475,000. 

40 percent of £475,000 is £190,000 – which is the eye watering amount of inheritance tax sum your beneficiaries would have to hand over to the taxman. 

Thankfully, it is possible to do a little tax planning to reduce that tax bill

Life insurance policies can be written into trust, which means they are classed as an asset and avoid becoming part of your estate. Not only does this protect them from inheritance tax, it means they are paid out to beneficiaries directly. 

What’s more, some people choose to take out a whole of life policy and write it into trust specifically to provide their beneficiaries with a lump sum that can be used to pay their IHT bill.

Writing a life insurance policy into trust can be as simple as filling out a form with your insurer, but it is prudent to get advice from an expert regarding your situation first. 

What happens if your life insurance provider collapses?

Finally, with the COVID-19 pandemic causing many companies to struggle or even collapse, you may be concerned about taking out such a long insurance policy. What if the insurer collapses in the next 20 years?

Thankfully, protection is available. The Financial Services Compensation Scheme (FSCS) that protects UK bank accounts covers life insurance policies, too. 

Check the Financial Services Register to ensure your insurer is listed.

26th August 2020