Whole Life Insurance

Whole life insurance is the name for a group of life insurance policies that will pay out whenever you die, as long as you keep up payments on the premiums. Although they comes in various forms, the policies are used primarily as a way of giving dependents and other family members a cash sum on death that can avoid inheritance tax. Simply put, you pay your premiums each month and when you pass away your named heirs received a cash payment.

When most people think of life insurance the technical term of the policy group they are thinking of is level term life insurance. This is because level term life insurance is far more popular than whole of life cover. Level term life insurance pays out at a fixed level of payment for a fixed term of coverage, for instance £50,000 for 20 years. Whole of life insurance differs in that there is no fixed term of coverage, and as long as premiums continued to be paid it will eventually pay out on death.

Whole of life cover requires that you keep up with your premiums for either your entire life or until you reach a certain maximum age set by the insurer, although not all insurers have a maximum age. The insurers are placing a bet that you will live long enough to pay more in real terms in premiums than the cash payout when you die. This differs from level term insurance in that the insurer there are betting that you don't die within the period covered. Because of the fact that they will always pay out, whole of life insurance is far more expensive for the same level of coverage than level term insurance.

Over 50s life insurance is a specific form of whole life insurance, but we've got a separate guide on that topic - this guide is for more general types of whole life insurance that can be taken out at any point in your life.

Types of Whole Life Insurance

Guaranteed Cover - this is a form of whole life insurance where you pay a fixed sum for life. It can not be cashed in at any point, and no part of the money is for investment purposes. It's expensive but stable. The main dangers are that the insured amount is eroded by inflation. Generally this is not a popular type of whole of life insurance.

Balanced cover - in this form of whole life insurance, which is also known as unit-linked cover - your premiums will be fixed for a set period such as a decade before they come up for review. A proportion of your premiums will go towards an investment fund which, if it performs well, should means your premiums don't go up. With this form of cover you can eventually cash in the policy, typically something that if done is best done later in life when the value is higher. Some people have complained to the Financial Ombudsman that they have been mis-sold this type of insurance by not being told that their premiums will eventually be reviewed.

Maximum cover - this form of whole life insurance has variable premiums which will typically go up as you get older. It will allow you the option of either reducing your coverage or increasing your premium. Premiums start low if you are young and healthy but will go up as your risk of death increases. The main downside of this type of cover is for those who exceed the average life expectancy it can leave only a very small payout indeed.

What about inheritance tax?

This currently depends on how you set up your policy. Those who place their policy in trust then as things stand it does not count towards your estate when you die and therefore does not count towards inheritance tax. Placing a policy in trust is quite a simple thing to do, but must be done when you take out a policy. Most insurers will provide you with the relevant forms to do this when taking out a policy, and typically there is no need to pay for a solicitor to do this on your behalf.

Those who do not place the policy in trust will see it count towards their estate. As things stand any value of the estate higher than £325,000 will be assessed for inheritance tax at 40%. Your estate will include the value of your home, so if you live in an expensive part of the country such as London or other areas of the South East your estate value may go over this amount even if it seems high. While it may seem unlikely, there is a small possibility that a government may decide that whole of life insurance is a method of dodgy inheritance tax and remove the in trust method of avoiding taxation.

Many people take out whole life insurance primarily for the inheritance taxation benefits. Many policies have limits on what age they will accept applications, often being between 60 and 70, so if you are considering taking out a policy for inheritance tax reasons please do ensure you act before you pass the cut off point.

Should I go for whole of life insurance?

This obviously is a personal choice, but there are advantages and disadvantages that can be weighed up to help you make that choice.

The main advantage is that your life insurance will eventually pay out, so you are guaranteed coverage as long as you keep paying your premiums. With level term insurance you'll only get a payout in the typically highly unlikely event that you die during the coverage.

The main disadvantage is high premiums. Even with maximum cover where they start low, they will eventually become much higher than level term insurance premiums and could even eventually become unmanageably high forcing you to reduce your cover or leave the policy. Unless you opt for guaranteed cover, which has the highest premiums, you are at constant risk of being asked to pay higher premiums each review.

Consider if it would be better getting either level term insurance or mortgage life insurance to cover your mortgage and putting away the difference in premiums between these policies and the cost of premiums with a whole life policy into a savings product. This way you do not need to worry about missing premium payments and you are saving up funds that can be used on a rainy day by yourself if necessary and not just by your children or other heirs.

How do I ensure my premiums aren't too high?

Unlike life insurance for over 50s which generally doesn't ask medical questions, whole life insurance policies do enquire into health and medical histories and in some cases may even require you to have a medical checkup. Factors such as age and if you smoke are generally the biggest affecters of premiums, and while the first is unavoidable the latter is something you can change. You have to be smoke free for a year to claim to be a non-smoker on insurance applications, but the reduced premiums could well make it worth quitting now and waiting a year prior to taking out this form of insurance.

General health is also taken into account, so ensure you're in the good section of the BMI chart and if not either lose or gain weight until you are. Other factors such as if you take vitamins, what kind of foods you eat, and if you go the gym or do other exercise are often questions that are asked and affect your premiums. Get into a good healthy lifestyle prior to applying. Sadly occupation is also a major determinant on insurance premiums, some occupations such as in construction or mining still do have lower life expectancies but many jobs seem unfairly penalised by insurance companies. Sometimes you can have your employer modify your job description to save money insuring, and as long as the new job description is accurate for what you do this will be perfectly legal.

How to decide which policy

Your first consideration should be which type of whole life insurance you want to go with, see our definitions above to help make that decision. After you've chosen a form your next decision will be typically based on the quotes given by the companies for the level of coverage you want. This is an important factor, but it isn't everything. Remember you need to consider not just what you can afford now, but what you'll be able to afford in retirement. While fixed policy premiums will remain the same throughout the policy others could increase, which could mean they become unaffordable in retirement. Our advise is to ensure you don't go for a high coverage amount if there's a chance the premiums will reach levels that you at some point won't be able to afford.

Those policies that place money into a investment fund vary in their performance. While past track record isn't everything, it does indicate how well managed their fund is and how good the fund is at correctly assessing risk. A good performing fund will generally stay better performing than a poorly performing fund, but beware newcomers whose good track record may be more influenced by exposure to a risky investment that may eventually turn sour like those funds who invested heavily in sub prime property in the USA. If your insurers fund performs poorly you'll have higher increases in your premiums.

Also check what investment growth the insurer predicts is required to maintain premiums at current levels. Compare it with other insurers and what financial publications think is achievable. This might take a bit of research but it's a good way of avoiding being caught out by having to pay higher premiums when the fixed term expires.

Some policies also have waiver of premium options that allow you to defer premiums if you're between jobs. As you will lose your policy if you don't keep up with payments it's best to take out this option even if you currently have savings that could pay the premiums in periods between jobs as you never know how your finances will be in future.

If your healthy it's generally best to get a policy that requires a medical or asks other health questions as you're premiums will generally much lower this way than taking out a policy that doesn't as those who live longer are more likely to reduce their cover or surrender the insurance.

Should I take the critical illness option

Often these policies will have an add-on option for critical illness cover. This will bring forward your payment if you are diagnosed with a condition that is considered terminal. Sometimes the conditions that payout are not always terminal because of medical advances, but in most cases the diagnosis will mean you have only at most a few years left to live. Having the payment at that time can be highly useful in paying off your mortgage if you can no longer work and to use spending quality time with loved ones.

The downside is that you'll be paying a lot extra despite the fact the insurance company would have to make the same payment anyway after your death. Other benefits such as sickness pay from your employer and government benefits for incapacity will often be able to cover your costs and allow you to avoid losing your home in most cases.

If you were considering taking out critical illness separately then getting them combined can be a good option, but will usually leave you with just a single payout rather than two. Nevertheless for the purposes most people take out life insurance for this will cover everything you need to pay off such as your mortgage and other debts.



Content by Robert Prime