Whole of life insurance pays a lump sum to your dependents on your death, whenever that may happen, rather than only paying out if you die before a specified time.
In this way you are covered, and your loves ones are protected, for the rest of your life. Whole of life insurance could be for you if you want to leave a tax free lump sum when you die or you may have inheritance tax to pay, as long as you make sure the policy is written in trust.
You can pay for whole of life insurance with a lump sum or through monthly or annual premiums. How much you pay will depend on your age and health.
Some whole of life insurance policies are linked to an investment fund while others solely provide life cover. Non-investment linked plans are usually cheaper as they do not have a cash value.
Investment linked policies, where a proportion of your premiums is used to buy units in a particular fund, could offer a cash-in value if you decide you no longer need the policy. However, cover without an investment element is guaranteed.
You can choose how much of an investment element to include, either minimum, maximum or balanced but this isn't set for the duration of the policy and can be altered if you wish.
Minimum has the greatest proportion of investment and minimum life cover. Maximum cover offers the most cover for your money but little investment. Balanced aims to maintain the level of cover throughout the life of the policy, with an equal emphasis on cover and investment. This relies on adequate investment growth, so premiums may need to be increased or cover reduced to maintain the balance.
Taking out balanced cover is a good choice if you want to be sure the cost of the premium isn't going to vary significantly. If you want to make your premium work for your cover and get the biggest sum insured for the smallest cost, then go for maximum, with the least investment element. If you're happy with a low level of cover but what to invest more money, minimum cover is your best option.
Investments are made into one of two types of funds - with profits and unit-linked.
Unit linked funds
A unit-linked fund pools together money from a number of investors to put into a range of stocks and shares. You can spread your money across this range of investments under the guidance of a professional fund manager. But if there is a fall in the market the unit price also goes down. This can be a positive though for long-term investors who can buy more units at the lower price and make a profit in the event that the market recovers. But any claims made during a market dip may mean the policy doesn't pay out what you invested.
With profit funds are lower risk in that they will be managed to ensure the highs and lows of the market are smoothed out. The fund manager will invest in assets like stocks and shares but will keep some of the fund profit in reserve so that investments grow more smoothly.
As cover gets more expensive as you get older, your policy will undergo several reviews and possibly amendments to the level of cover or the amount of premium.
Your insurer will want to see if the value of the fund has risen enough so to maintain the level of cover. If this isn't the case then your insurer will need to either increase your premium or reduce your cover to continue the policy as you get older. This may also be the case for balanced cover if the target growth rate hasn't been met.
The first review of the premium to cover ratio will take place seven to ten years after you take out your policy. Reviews will then continue every three to five years.
Your insurance policy may have other options to index link or increase the premium in stages.
You and your spouse or partner can each have single policies, or you can take out a joint policy where you can specify whether the payout is made on the first death, or critical illness, or the second if inheritance tax might be a consideration.
While whole of life insurance cover can be investment linked, and offer a cash value, it should not be used as a savings product but for its intended purpose only.
When a linked investment fund has built up, you may be able to use it to pay for future premiums and in this way a plan could be paid up and no future premiums are due. A surrender value may be possible if you decide you no longer need the policy and stop paying premiums.
Please note the value of your investment linked policy may go down as well as up and you may not get back your original investment.
The Financial Conduct Authority does not regulate inheritance tax planning and trusts.
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This article (What Is Whole of Life Assurance?) is intended to provide a general appreciation of the topic and it is not advice.
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Article expiry: 05 Apr 2018