What is a whole of life insurance policy?

What is the difference between whole of life insurance and fixed term life insurance? 

Whole-of-life insurance policies are those that continue up until your death – whenever that may be – while fixed-term life insurance has a set end date and will only pay out if you die before then.

How your money is invested

When you take out a policy, insurers invest your premiums for you. In general, they offer three types of investments:

1. Unit-linked funds. Allow you to buy (or sell) the units of investment funds, sometimes but not always run by the insurance company. The premiums you pay reflect the size of the payout you want from the policy and so can vary over time according to the performance of the investments; you may have to pay more if the returns are low. That said, your fund can take advantage of pound-cost averaging to buy more units when prices in the markets are falling.
2. With-profit funds. The premiums you pay are pooled together with other policyholders’ savings, with bonuses being applied if the investments perform well – although, again, you may have to pay higher premiums to make up the shortfall should the investments underperform.
3. Non-profit funds. The premiums are fixed and these funds simply pay out a guaranteed amount when you pass away.

What are the different types of whole life cover?

Most policies are investment-linked (also called unit-linked), which means your monthly premiums and the final payout can change depending on how the investments perform.

The two main types of whole-of-life cover are:

• Maximum cover: This type starts with cheaper premiums, but can cost more as the policy progresses to make up for investment downturns and ensure the target payout is achieved.
• Balanced cover: Also called standard cover, this type of whole-of-life insurance can start with higher premiums, because the monthly payments are supposed to stay the same for the entire term.

There are also whole-of-life insurance plans that charge a set monthly premium for a fixed rate of cover.

How much does whole life insurance cost?

Whole-of-life insurance costs vary between providers and can depend on how old you are when you take out the policy, how healthy you are, how much you would like your loved ones to receive when you die, and a range of other lifestyle factors.

It is usually a little more expensive than other forms of life insurance because of the guarantee that insurers will pay out a lump sum at some point, and you will be asked questions on a range of lifestyle issues when you apply – so expect to do some form-filling.

But there are sure ways for most people to secure more affordable whole-of-life insurance.

• Start young: The earlier you start paying premiums for whole-of-life insurance, the lower these monthly payments will be.
• Maintain a healthy lifestyle with a good diet and low alcohol consumption. A lot of us love a nice glass of red, but drinking every day won’t help with whole-of-life insurance costs.
• Quit smoking: This is tough for any addict, but try to do it as soon as you can. Smokers will usually pay much higher premiums and may not have access to the best whole-of-life policies.
• Don’t get more cover than you need: We would all like to leave our families a nice amount of cash when we pass away, to ensure they can stay happy and healthy. But it is not always necessary to set aside tens or even hundreds of thousands of pounds.
• Consider joint cover: Paying with your spouse or partner can help to reduce monthly premiums.

The guarantee of a payout is usually one of the main attractions of whole-life insurance

Are whole of life insurance policies taxable?

Normally, whole-of-life insurance payouts won’t incur any capital gains tax or income tax.

However, your family or beneficiaries might have to pay inheritance tax (IHT) on the final amount paid. IHT kicks in when your assets are worth over £325,000, and your estate will be subject to 40% tax on any amount above that threshold.

However, if your insurance plan is “written in trust” – basically, the final payout amount is put in a trust fund – then it won’t form part of your estate for IHT purposes.

Meanwhile, that insurance payout could be used to cover the IHT due on another part of the estate – stopping the family home being sold to settle the tax bill, for example.

Your insurance provider or a legal professional can do this for you, and life insurance can be placed in a trust at any point of the policy term.

Find out more: Guide to Inheritance Tax

Can I cash in my whole-of-life insurance policy?

Yes. It is perfectly possible to cash in or “surrender” a whole-of-life insurance policy.

However, most contracts will specify that money taken out of a policy before the event of your death will be subject to charges – and you could end up with much less than the final death benefit originally specified.

The best whole-of-life policies may allow you to do so with smaller penalties.

It is always worth checking the small print on anything you sign and making a note of any cut-off dates.

Pros of cashing in:

• You can borrow cash against your policy but you will lose part of your final payout from your insurer. The insurer will also charge interest on the loan, and customers will be asked to pay it back over an agreed term. Any debt that remains unpaid when you die will be taken off the value of the death benefit final amount.
• If you want to withdraw all of your funds, you won’t be liable for tax on the premiums you have paid so far. However, any additional gains made on your funds will be taxable.
• You can enjoy your retirement with more funds available to you.

Cons:

• You might lose your final death benefit amount.
• There are normally other penalties to pay.
• If you want to restart whole-of-life insurance, it can be more expensive if you have already cashed a policy in.

Find out more: How does mortgage life insurance work?

Is whole-of-life insurance right for me?

The guarantee of a payout is usually one of the main attractions. Few things are certain in life, so knowing that your loved ones will be taken care of whenever you die can be peace of mind worth paying for.

However, whole-of-life cover can be significantly more expensive than other types of life insurance – in some cases, up to five or ten times more costly.

Pros and cons of whole life insurance

Pros:

• Payouts to loved ones are guaranteed whenever you die – not just if you pass away within a set period
• Comes with potential inheritance tax benefits if set up correctly
• Whole-of-life cover can avoid probate, letting your loved ones gain access to funds more quickly

Cons:

• More expensive than other forms of life insurance
• Like other insurance products, premiums must be paid every month without fail to guarantee a payout
• Small print of conditions can be lengthy and confusing

Find out more: Guide to family finances

Who should get whole of life insurance?

• People with financial dependants – children or others who will need substantial funds when the policyholder passes away.
• Those who want the guarantee of a lump-sum payout in the event of their death.

When whole of life insurance is a bad idea 

• Unsuitable for people with grown-up children or other family members who can support themselves.
• Unsuitable for those who have paid off all their debts, including their mortgage, and have also accrued substantial savings.

Where can I get a whole of life insurance policy?

The internet is full of recommendations, but sometimes speaking to an expert, such as an independent financial adviser, is the best option as they will look closely at your circumstances and help choose what’s right for you.

Whole-of-life insurance policies are also available direct from specific insurers.

If you are well versed and confident in your choice, this could be a good option. All the main UK insurance companies offer whole-of-life insurance, including Aviva, Scottish Widows, HSBC, Legal & General and Vitality.

First published in The Times on 6 July 2021