What is whole of life insurance?
Whole of life insurance guarantees to pay out a lump sum of money to your family when you die.
Unlike term insurance which pays out when the policy holder dies with a specific time frame or ‘term’, whole of life insurance will pay out regardless of when the policy holder dies.
Because the insurer knows they will have to pay out, whole of life insurance can be more expensive than level and decreasing term policies.
How does it work?
You pay a monthly premium to the insurer. In return the insurer will pay out a fixed amount of money to your loved ones when you die. You choose how much money you want the policy to pay out, but the higher your cover amount, the more you’ll pay in premiums.
Types of whole of life insurance
Your premiums won’t change, however you’ll usually pay them for the rest of your life until you die. The sum assured doesn’t change.
Limited payment term
You and the insurer agree a time when your monthly premiums will stop. For example, this could be when you reach retirement age. Despite your payments stopping, your cover will remain in place until you die and the amount of cover won’t change.
Your premiums will be reviewed at specific points during your policy. This may be because the policy is linked to inflation or RPI (retail price index), or because part of the policy includes a savings or investment portion.
Is it worth it?
Having whole of life cover in place can provide you with piece of mind; knowing that when you pass away your family will have some financial security.
Common reasons for buying whole of life insurance include:
- Helping pay inheritance tax
- Leaving a guaranteed inheritance
- Leaving a lump sum to help pay for the care of a loved one (for example a child with special needs or a disability that requires specialist care)
- To pay off loans or other debts owed
- To help pay for a funeral
One of the main reasons people choose whole of life insurance, over any other type of cover, is because it’s guaranteed to pay out.
Inheritance tax planning
Whole of life insurance can be used to help pay some or all your inheritance tax bill.
Inheritance tax is charged at 40% of your inheritable estate over the threshold of £325,000 (2014). Life insurance pay-outs, like any other asset also form part of your estate, unless they’re placed in trust.
By writing your policy into a trust, pay-outs from your life insurance policy will be protected from inheritance tax.
Claims from policies written in trust can usually be paid before probate is granted, making the process from claiming to receiving the money much faster.
Typically, insurers can help customers put their policies into trust, simply by completing what’s known as a ‘trust form’. There is usually no cost associated with this service
If you choose not to put your policy in a trust, it’s possible that any money owed to creditors at the time of your death may be paid before your beneficiary receives any of the proceeds.
“When placed in a trust, whole of life policies can be used to off-set inheritance tax.”
How much cover do I need?
If the purpose of your whole of life insurance is to cover impending inheritance tax, calculating how much tax your estate would be liable for can be a good place to start.
If however you simply want to leave a lump sum to your family, you could choose any amount you wish up to the insurer’s maximum (often in the £ millions).
If you wish to insure your life for over £650,000 you may need to answer some basic financial questions.
How much does it cost?
Your monthly premiums will be affected by the amount of cover you choose as well as your age and whether you smoke or not. Insurers may also require additional medical or lifestyle information before providing a quote.
If you stop paying your monthly premiums, your cover will stop, and unless otherwise stated in your policy, you won’t be able to claim any money back that has been paid in to the policy.
Can I be refused whole of life cover?
Yes. An insurer is not obliged to provide cover and in some circumstances may refuse to accept you.
An insurer may refuse whole of life insurance cover if:
- You or your close family suffer from certain medical conditions or have done so in the past.
- You take part in some extreme sports or have an occupation that puts you at risk of injury or deah.
- You’re beyond the maximum insurable age.
Alternatives to whole of life insurance
Level term life insurance provide the same or much higher level of cover for a fraction of the cost of whole of life insurance. The main difference is that this type of cover will only pay out if you die within the term of the policy. For this reason, level term life insurance is less suitable for inheritance tax planning.