Whole life insurance – How much do you need?

8 min Read Published: 01 Jul 2022

Whole of life insurance calculator

Whole life insurance which insures your life and pays out when you die, regardless of when that happens can be referred to as 'Whole of life insurance' as well. People who wish to buy a life insurance policy that will pay out a cash sum when they die are usually concerned about death taxes like inheritance tax; they may also wish to leave money behind to pay for funeral arrangements or simply to gift to someone.

In this article, we describe whole life insurance and how to ensure you select the right type of life insurance policy and a level of cover that will meet your needs. 

If you are unfamiliar with a whole life insurance type of policy, you may find it useful to read our article, "Whole of life insurance - what you need to know"

What is whole life insurance?

Essentially, a whole life insurance policy provides a lump sum of money when you die, whenever that may be. Unlike term life assurance policies - which only pay out if you die during the term - it does not expire after the number of years that you choose. Instead, this type of life cover continues to protect you until you die, at which point a claim can be made and paid to the beneficiaries for the amount of death benefit that was arranged.

Whole life insurance can feel complex but as long as you have worked out what you need first, it should be quite simple to arrange. Understanding how much money will be needed when you die and who should receive it are foremost in this.

How much whole life insurance do I need?

Working out how much life insurance you need will depend on the reason that has prompted you to think about life insurance. The purpose should be clear to you but here are some common reasons for choosing a whole life insurance policy:

  • Funding an inheritance tax bill
  • Paying for your funeral
  • Leaving a legacy

Your own specific needs may be different or they may be a combination of the above. Either way, working out how much money will be needed when you die is vital. It is usually simplest to look at each of your requirements individually before you combine them and you can do this yourself, rather than using a complex online whole of life insurance calculator. 

Whole life insurance to fund an inheritance tax bill

You can choose to buy whole of life insurance that will fund all or part of the inheritance tax bill that arises upon your death. You should take the time to work out what your inheritance tax bill will be and it is wise to think of ways that it may change. The value of your estate may increase or decrease over time and gifts made during your lifetime may also affect its value and the resultant inheritance tax bill. If your estate is not simple, you should seek professional advice to ensure that you have considered this complex area appropriately. A solicitor and/or a financial adviser can provide the necessary advice. 

You may need to consider extra factors that affect your potential inheritance tax liability such as "Business relief for inheritance tax" and the "Residential nil rate band". Also, it is worth noting that gifts made to registered charities are usually exempt from inheritance tax. Whether you make this gift upon death, through your will in the form of a charitable legacy or a gift to charity during your lifetime, the value of the gift will be exempt from inheritance tax. Furthermore, giving 10% or more of the value of your net estate to registered charities can reduce the inheritance tax charge from 40% down to 36%.

Once you calculate your potential inheritance tax liability, the level of your whole life insurance cover should reflect this and you can protect it against inflation by choosing increasing cover if necessary.

You can calculate your inheritance tax liability using our inheritance tax calculator.

Whole life insurance to fund the cost of a funeral

Whole life insurance policies can fund the cost of a funeral and there are specific types of whole life insurance that are designed to do this called Over 50s life insurance and Funeral Plans. Choosing the right type of whole life insurance for your particular circumstances will depend on many factors so it is extremely useful to speak with a specialist life insurance adviser*

The average cost of a funeral in the UK is around £4,000 but this will vary depending on where you live and whether you opt for a cremation or a burial (see table below). Discussing these types of arrangements with family and friends can be difficult but it is useful to work out who would need access to the money in order to make arrangements. Some funeral life insurance plans will pay the funeral arrangers directly.

Ensure that the level of cover you choose for your whole life insurance will be sufficient for the type of funeral arrangement you would like and factors in inflation and the increasing cost of funerals.

Cost of a funeral in the UK

English region and UK Nations Cost of a simple cremation Cost of a simple burial
London £3,272 £7.259
South East England £3,328 £4,831
South West England £3,351 £4,857
East of England £3,351 £4,857
Wales £3,189 £4,149
West Midlands £3,363 £4,750
East Midlands £3,356 £3,744
North West England £3,159 £4,170
Yorkshire and the Humber £3,321 £4,112
North East England £3,261 £4,122
Scotland £3,160 £4.030
Belfast £2,863 £3,061

source: www.moneyhelper.org.uk

Whole life insurance to leave a legacy or gift

Leaving a legacy or gift after you die is a very personal decision and one that may not be determined by a need but rather a want. For this reason, the value that you attribute to this is subjective and depends on your wishes. If the money is meant to provide for something specific like school or university fees then do factor in the effects of inflation on the value that you choose.

Who gets my whole life insurance when I die?

Your life insurance will pay your death claim money to a trust account if you have arranged a trust with your life insurance and will be paid to your estate if you have no trust in place. Trusts distribute the money from your life insurance claim through a trust account. If you arranged a trust, your assigned trustees become responsible for distributing the money to your nominated beneficiaries. However, with no trust in place, the money will end up in your estate and will be distributed according to your will or the rules of intestacy if you have no will in place.

  • Write a will - Firstly, if you haven't done so already, then it is very important that you write your will. A will does more than just allocate your worldly possessions according to your wishes. It also safeguards any children that you may have, ensuring that they are cared for as per your wishes and instructions. A will is usually a key part of putting your affairs in order and planning for the future.
  • Arrange a trust - Next, you should consider arranging a trust that specifically links to your whole life insurance policy. A trust is a legal document that can be attached to your life insurance policy to set out who will manage and allocate the funds from a claim (trustees) as well as who should benefit from them (beneficiaries). There may be instances where a trust isn't suitable or a specific type of trust is needed. Trusts can be difficult to change and/or cancel once they are in place but certain types of trusts allow more flexibility than others.You can read more in our article "Writing your life insurance in trust"

Speaking to a life insurance specialist* will help you to determine the best way to ensure your wishes are carried out while minimising any potential inheritance tax bill. Any funds paid from your life insurance policy through a trust are paid outside of your estate and are not liable for inheritance tax.

If you do not arrange a trust with your whole of life insurance policy, the proceeds of the claim could be added to your estate, increasing its value and the potential inheritance tax payable against it.

Checklist when buying whole life insurance

Payout amount
  • The amount of money paid out by your life insurance when you die should match what you wish for it to achieve with it.
Funding inheritance tax
  • Have you worked out your IHT bill?
Changing the amount of life insurance
  • Some insurers will allow you to increase or reduce the amount life insurance you have.
Increasing payout conditions
  • In what events will you be able to increase your payout amount without having to answer medical questions again?
Who do you want to benefit?
  • Have you arranged a trust to ensure that the money reaches your intended beneficiaries tax-free and without adding to your estate?
Premium payment
  • You can usually choose to pay annually or monthly by direct debit
Period of payment
  • Some policies become paid up at a certain age while others carry on charging as long as you live.
Type of payment
  • Premiums can be fixed and guaranteed or reviewable. A fixed premium may be more expensive but will provide certainty of cost and affordability. A reviewable premium can be cheaper at the outset but may increase to the point of being unsustainable in the future.
Terminal illness benefit
  • Most good policies include this option which allows the death benefit to be paid early if the insured person has less than 12 months to live.
Later life care options
  • Some policies include this benefit to claim a part of your payout to fund nursing/residential care if needed.
Free life cover
  • Good insurers provide free life insurance whilst your application is being assessed but existing health problems will usually be excluded.
Policy exclusions
  • Some policies may not pay out for suicide in the 1st 12 months of the policy.
  • Other exclusions may be added and will be noted in your policy schedule.

Cost of Whole of life insurance in the UK

Working out how much your whole life insurance policy will cost can be tricky. There aren't many online comparison tools that provide costings of whole life insurance and even when there are, they are quite limited so you can end up thinking that your whole of life insurance will cost one price and by the time you apply, the price changes.

Additionally, online tools don't help you to arrange your trust for your whole life insurance policy setting out who it will pay out to when you die.

When working out what type of whole life insurance policy to buy and sourcing the best rates for your life insurance, you will usually benefit from speaking to a life insurance specialist*. A specialist life insurance adviser has access to the whole life insurance market so they can search across a number of insurance companies and products to find the best and cheapest life insurance for you.

At Money to the Masses we have put LifeSearch through its paces and have found the advisers to be knowledgeable and helpful in arranging life insurance. The advisers are well placed to review your circumstances as well as any life insurance policies that you may already have. With experts who deal with whole life insurance, you'll receive help to choose the best policies. You'll also receive up to £100 cashback when you arrange your policies as a Money to the Masses reader.

 

If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following links can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch, VouchedFor, Unbiased