Names of products in the life insurance market aren't always as self-explanatory as we would like. When it comes to life insurance, there are a variety of product types that suit different scenarios. Whilst most people assume that life insurance pays out when you die, irrespective of how much time has elapsed since the policy was initially purchased, this is only true for some types of policies. Whole of life insurance is one of these policy types.
In this article, I will look at:
- How whole of life insurance works
- What whole of life insurance will cost
- Life expectancy
- The purpose of a whole of life insurance
- Whole of life insurance or a term life insurance?
- How to get help arranging your life insurance
I'll also look at average life expectancies so we can work out the viability of paying for whole of life insurance.
What is whole of life insurance?
Whole of life insurance is a type of life insurance policy. The 'whole of life' title means that the policy is designed to protect you for the rest of your life or the 'whole' of your life. This type of life insurance tends to be more expensive for the amount of payout you can expect. The more common type of life insurance to be bought is term insurance - life insurance that protects you for a set number of years. It is usually cheaper because it pays out if you die within the policy contract and there is no payout if you outlive it.
Like most life insurance premiums, whole of life insurance premiums are invested by the life insurance company. The company relies on a return from these investments in the stock market to generate the money it uses to pay its policyholders. Given these policies are designed to pay out "when" and not "if" you die, the life insurance companies need to ensure they are priced accordingly.
If you want or need your life insurance to continue until you die, whenever that may happen then you probably need to look at whole of life insurance.
How does a whole of life insurance policy work?
Largely, a whole of life insurance policy will pay out a sum of money when you die. However, there isn't just one type of policy that protects your life until you die and it is worthwhile looking at each type to work out which suits you best.
Over 50s life insurance
An over 50s life insurance policy is one that pays out when you die so it can seem like a whole of life insurance policy. However, the main difference here is that an over 50s policy usually doesn't ask you any health details - it accepts you on the basis of your age and smoker status alone. The cost of this type of policy is usually quite high for the amount of payout it will provide. You can read more about it in our article "Which is the best over 50s life insurance?"
Suited to: people over the age of 50 who have health problems that would make it too expensive or impossible to arrange other types of life insurance.
Maximum cover whole of life insurance
The word 'maximum' in 'maximum whole of life' indicates that it is providing the maximum amount of payout for cost. It can also be referred to as a 'minimum' whole of life insurance, indicating that the premium or cost is at the minimum level.
The cost for this type of policy is usually the lowest for the value of payout you get at the outset but premiums can and almost definitely will increase at various intervals during the policy life. These intervals are normally referred to as reviews. The reviews allow the insurance company to track the returns it is making based on the current premium and decide if it will need to be increased to meet the payout value upon death.
If you can't or don't want to pay the increased premiums then you can usually reduce the amount of payout instead or opt for a bit of both.
Helpful tip: Although this option can seem very attractive initially, some people will become quite unhappy about the increase to premiums as they get older. Especially if the increases happen at a time when they are about to retire and start winding down their outgoings. Even if you choose to reduce the amount of insurance to keep the cost affordable, it can feel disappointing compared to what you were expecting. If you think this might be true for you then the balanced or guaranteed options may be better for you.
Suited to: people who want the life insurance to pay out when they die but want the lowest cost possible at the start of the policy and are happy to pay increasing costs in the future.
Balanced cover whole of life insurance
A balanced whole of life insurance policy provides a more balanced cost over the years, for the payout that you want. It isn't the cheapest type but by paying slightly more from the start of the policy, the cost is less likely to jump up dramatically at reviews. Reviews usually take place every 10 years but can become more frequent later in life. In effect, you're smoothing out the overall cost of the policy so it doesn't suddenly become unaffordable for you.
Suited to: people who want the life insurance to pay out when they die and are happy to pay more from the outset to avoid large increases to the premiums of the policy in the future. You're hedging your bets a bit with this option.
Guaranteed whole of life insurance
A guaranteed whole of life insurance policy ensures that the payout and the monthly cost are guaranteed to remain the same until you die. The cost of this type of policy is usually the highest because the life insurance company will not have the opportunity to adjust the cost in the future by means of a review. This type of whole of life insurance makes it easiest to see how much the policy may cost over your lifetime.
Suited to: people who want life insurance to pay out when they die and do not want any fluctuations to the cost or level of payout for the policy over time. This type of policy is a lot easier to budget for and maintain than the balanced or maximum options.
Whole of life insurance - Summary Guide
|Type of Whole of life insurance||Cost||Good for people who:|
Cost of whole of life insurance
Often people are keen to work out how viable the cost of a whole of life insurance is compared with the size of the payout. Clearly the value is largest if death happens prematurely and the policy pays out much more than what was paid in.
However, looking at this reasonably we can use a person's average life expectancy to work out the cost of a policy over their lifetime. I will only look at the guaranteed whole of life insurance option here. Being a fixed cost, it is easier to predict how much someone might pay overall. The other types of policy costs can change so it is much more difficult to work out the overall cost of those.
The most commonly available whole of life insurance is a guaranteed one where the cost and the payout from the policy remain the same until death.
Below you can see that the cost of a guaranteed whole of life insurance policy over your lifetime is much less if started at a younger age. Smoker rates are higher but even in this group we can see that starting a policy at a younger age can make the cost viable.
Whole of life insurance costs - Guaranteed - Non smoker
|Non-smoker aged:||Guaranteed Monthly Cost for £100,000 insurance||Overall cost based on average life expectancy of a female||Overall cost based on average life expectancy of a male|
Whole of life insurance costs - Guaranteed - Smoker
|Smoker aged:||Guaranteed Monthly Cost for £100,000||Overall cost based on average life expectancy of a female||Overall cost based on average life expectancy of a male|
What is my life expectancy?
The Office of National Statistics gives us some insight into our life expectancies as well as the probability that we may live beyond this. If you have longevity in your family or you just wish to see what the cost of the policy could be if you were to live longer, you can work this out using the table below.
|Gender||Current Age||Can expect to live to:||1 in 10 chance of living to age:|
What purposes does a whole of life insurance policy suit?
It may seem obvious to point out but whole of life insurance is only really needed if you will need the sum to be paid whenever you die.
If we think about all the usual financial worries we have, should we die, these tend to diminish as we get older. Mortgages, debts, children, partners all become less of a financial responsibility as we reach the golden years. The most cost-effective way of insuring against these is always going to be a term insurance policy. If you outlive the years that you were worried about, your policy will stop and you'll get nothing back except the peace of mind it provided during those important years. You can read more about how to choose in my article: "Which life insurance is best for me?"
However there are a few reasons why you might want your life insurance to pay out when you die. These include:
- Inheritance Tax
- Funeral Expenses
- Leaving a legacy
Fund your inheritance tax bill with a whole of life insurance
There are various ways to plan your estate to minimise the inheritance tax that will apply if you exceed allowances. However, if your estate will still become liable for inheritance tax a whole of life insurance policy can fund the tax bill.
The payout from the life insurance policy can be used by your beneficiaries to pay the inheritance tax bill. This can prevent them from having to fund the inheritance tax bill through their own money or by taking it from the estate, thus reducing the value of the legacy you leave.
It is vital that these policies are written in trust for your beneficiaries. This will stop the payout from adding to your estate and further, inflating the tax liability. Instead it will separate the life insurance payout through the trust allowing your beneficiaries to use it to pay the inheritance tax applicable.
A trust is a legal document that can be completed and almost always should be completed alongside your life insurance policy. It allows you to stipulate who you wish to benefit - you can even split the benefits between different people. It also bypasses the probate process so that your beneficiaries can receive the money quickly and free of tax.
You can read more about trusts in our article "Writing your life insurance in trust – How it works and why you should consider it"
Funding your funeral costs
If you wish to ensure that there will be enough money to pay for your funeral, a whole of life insurance can provide this. Many people look to over 50s plans to provide for funerals and whilst the upside is that you usually won't have to answer questions regarding your health, the downside can be less payout for cost and qualifying periods during which there may not be a payout.
A whole of life insurance policy can be arranged at an earlier age and may not be as limited in terms of the sum that will be paid when you die. You may even opt for a balanced or maximum cover whole of life insurance that will provide a larger amount of payout during your formative years and you have the option to reduce the amount of payout in your later years.
Writing your policy into a trust will ensure that the payout from your life insurance doesn't become encumbered by the probate process. After all, these costs will need to be met quite quickly after death so it makes sense to get the money into the hands of those who will need them without delay.
Leave a legacy after death
Legacy, nest eggs or end of life gifts are the way that we describe leaving assets for people after we die. Some people will create legacies using a whole of life insurance policy. It is useful to work out the costs versus the rewards from this especially if it is not an essential need and more of a "nice to have". Unless the costs are fixed and guaranteed, you may even find you can't afford to maintain them. Arranging an affordable amount of life insurance at a fixed cost can be the wise move here.
As before, you should arrange a trust for the policy. The trust will allow you to nominate your beneficiary or beneficiaries - you can split benefits between different people if you wish. The benefits will be paid tax-free into the trust and then onto your beneficiaries upon your death.
Should I take whole of life insurance or a term life insurance policy?
This is a very commonly asked question. Where the relatively low cost of a term insurance policy can be attractive, you may still feel attracted to the certainty of a return from a whole of life insurance policy. Often it can be a useful exercise to work out how much your term insurance policy will cost over the number of years that you would arrange it for. Then look at the overall cost of your whole of life insurance policy using the average life expectancy data in this article. Comparing these may help you to decide.
The rule of thumb here is that you should let your need determine which type of life insurance policy to buy. If you will not need a death payout beyond a certain time period, the extra cost of a whole of life insurance policy may be unwise. On the other hand, you may not be able to foresee that period of your life and wish to make some provisions just in case. Affordability and budgeting should drive your reasoning in this respect.
How to get the right type of whole of life insurance at the best rates
The most beneficial thing to do is to speak with a specialist life insurance adviser. They will talk through your needs and wants before steering you to options that will be best suited to you. Additionally, they will help you to arrange the trust for your life insurance policy as this can feel like a complex exercise.
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