Whole Life Insurance: What You Need to Know

Whole of life assurance (or insurance) is an insurance policy that remains effective for your entire life and pays out on your death.

Consider a whole life assurance policy

Whole life is arguably the simplest variety of life insurance coverage that you can buy, and its features include protection for life complete with premiums that are guaranteed for at least a period of time.

Your loved ones will receive an agreed payment amount when you pass away, and most policies have some form of cash value too in the event that you need to cash it in before you die.

The only way you are guaranteed to lose coverage is if you stop paying your premiums or if you cancel your policy.

What are the differences between a whole of life assurance policy and a term life insurance policy

The difference between whole of life asurance and term life insurance is that term insurance runs for a defined period. You are effectively taking out insurance in case you die in a certain period of time

This means that with term life insurance you decide how long you want the term of the policy to last, for example 20 years.

If you die during the time your term insurance is in place, it pays a tax-free cash lump sum to your loved ones. However, if you live beyond the term, your plan has no cash-in value.

With whole of life assurance, payment is inevitable ie you will die at some point whilst the policy is in force and payment is assured.

For this reason the cost of a whole of life policy is higher than a term policy.

What affects your whole of life insurance premiums?

As with all insurance the amount of premium you have to pay will be determined by the level of risk you present.

Basically this means how soon after taking out your policy does the insurer expect to have to start paying out against it because you have died.

Your level of risk will be determined by a number of factors, including the sum insured, your age, your overall health, how much you drink and whether you smoke.

The higher the risk you present, the higher your premium.

Do you pay the premiums all your life and do they stay the same amount?

Life insurance premium payments
Life insurance premium payments

Some plans are set so that you really do have to keep paying them until you die.

Others define an age, perhaps 70, 85 or 90 for example, which once you have reached you no longer have to pay premiums even though the cover will stay in place until you die.

Be aware that many insurers guarantee they won’t increase your premiums and sum insured for a period of time.

However as they are mostly linked to an investment fund, after this time the insurer will review your plan.

The result of the review may mean there is no change in your policy payments or cover.

Alternatively the review may lead to the insurer raising your premium payments and keeping your cover level the same or reducing the amount of cover they will provide but keeping the payments the same.

It is important that you are clear on how this guarantee works.

Uses Whole Life Assurance

  • Providing your loved ones with a lump sum on your death – If you die, your partner may need a sum of money from this sort of insurance policy to help pay bills, pay off any loans you have, maybe pay off your mortgage and replace your lost income.
  • A lump sum to pay for your funeral – this can take away the worry from your loved ones so that they know they don’t have to worry about your funeral costs.
  • Pay off Inheritance Tax – having a lump sum to pay this tax could avoid the need to see your family home being sold to pay it – unless you write your policy in trust – see below.

Single or joint life insurance policy?

If you are in a relationship you might think that a joint life policy is the best option.

However, in order to decide whether a joint or single life policy is best, you need to understand the implications of each choice.

With joint life cover for example, you will be protected on the same plan with the same terms and conditions. Single life plans will be entirely separate and each can have their own terms and conditions and a claim on one will not affect the other.

With a joint policy, there can only be one payout. So if you were both to die in a tragic accident, your dependents would only receive one lump sum from the policy. In contrast if you each had your own policy, each policy would make a payout according to its own terms and conditions.

Also, if you take out a joint policy and your relationship ends, it can mean there are all sorts of complications to sort out with the life policy. It isn’t a simple case of splitting it down the middle!

Consider writing your Whole of Life Policy in trust

Whilst the proceeds of whole of life cover do not usually attract income or capital gains tax, your family could find they are liable for inheritance tax (IHT) on the payout.

This means it is wise to consider writing your policy ‘in trust’. By doing so, it means that the money will go to the trust and will not form part of your estate when you die. This means it will not be included within any IHT calculations.


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