Guide: Whole Of Life Insurance
Whole of life insurance is defined as life insurance
that guarantees a death benefit to your beneficiaries no matter when you die. The death benefit is the amount of money paid out upon your death and is often referred to as the amount of cover you take out. Unlike term life insurance
, which covers you only for a pre-agreed term, whole of life insurance covers you for your entire life.
As a result, whole of life insurance is typically more expensive than term life insurance as you’re potentially covered for longer. It’s also intended to cover your entire life and pay your loved ones no matter what. Term life insurance is usually designed to cover your mortgage
or provide a payout for children before they reach financial independence, in the event, you die young.
How it works
There are three main components of whole of life insurance:
- Cash values
There are lots of types of whole of life insurance. Some are linked to investment vehicles with cash values whilst others offer fixed monthly premiums and death benefits. Those that are investment-linked (or unit-linked) will payout depending on the performance of the investment. If you opt for a fixed premium policy, the payout (death benefit) will remain fixed as well.
There are also 'cash values' within investment-linked policies. These are additional benefits (a sort of side pot) that you build up over time, based on the performance of the investment your policy is linked with. Withdrawing from this pot doesn’t affect the payout (death benefit) of your policy. Some policies called ‘universal life policies’ allow you to apportion some of the cash value to your beneficiaries in addition to the death benefit.
As these insurances are often far more complicated than a standard term cover and require an understanding of the investments on offer, it’s vital you speak to a qualified advisor before buying a policy for yourself.
Why whole of life insurance?
Whole of life insurance is usually more expensive than term life insurance, so what might make it worth having? The main reasons are outlined below:
- A whole of life insurance policy offers you peace of mind because it guarantees your relatives will be protected financially after your death, no matter when it occurs.
- The payout can be exempt from the usual 40% inheritance tax (IHT) if you write it into a trust. They may receive more than they would with term life cover because of the investment element of whole life cover.
- Its cash value can be a source of tax-free funds during your lifetime
Types of whole of life insurance
As suggested above, whole of life insurance can be broken down into 2 main types.
Sometimes called standard cover, this is the easiest type to understand. You pay a fixed monthly premium and when you die, the insurer pays out a fixed amount (death benefit) to your named beneficiaries.
Here your insurance is linked to an investment fund. Your insurer invests your money (along with everyone else’s in the fund) to try and grow the overall pot. Your monthly premiums are reviewed at intervals throughout the policy and your cover changes according to the performance of the investment. Whilst the premium may start off cheaper, they will normally increase over time and can become substantially more.
Cost of whole of life insurance
Whole of life insurance is more expensive than term life insurance as it offers a guaranteed payout (term life insurance may not payout at all if you die after the policy expires).
You’ll need to pay the whole of life policy into retirement, not just when you’re working and so this needs to be considered from the start. If you miss any payments, the policy will be cancelled and no monies paid out.
The actual cost of the insurance will be determined by age, amount of cover, your health and so on. Remember it will also likely change as the policy matures to reflect its investment-linked performance
To conclude, Whole of Life insurance is suited for people who are seeking lifelong insurance policies that can help towards inheritance issues as well as the capability to grow a potentially tax-deferred cash value.