What is whole of life insurance, and how does it work?
Key takeaways
- Whole-of-life covers you for life, not just a set term. It's a guaranteed payout whenever you die, as long as you keep up with premiums.
- There are two types: non-profit (simple and fixed) or with-profit (investment-linked). With-profit can grow in value but comes with more risk and complexity; get independent financial advice before going down that route.
- Be honest on your application. Inaccurate information can get your policy cancelled or your family's claim rejected.
- Buy sooner rather than later. Premiums go up with age, so locking in a policy while you're younger will save money in the long run.
What is whole-of-life insurance and how does it work?
Quite simply, a whole-of-life insurance policy covers you for life and pays out a guaranteed amount when the policyholder dies. Like most other forms of insurance, the policy only remains valid providing that annual or monthly premiums are paid.
As it's effectively a guaranteed payout, so long as premiums are paid, it's also known as 'life assurance' opposed to 'life insurance'.
There are two types of whole-of-life insurance: non-profit and with-profit. Figuring out which policy suits you best should ideally reflect your needs from a life insurance policy.
A non-profit policy, for example, tends to offer a more fixed option that can help pay for funeral costs and provide an inheritance to loved ones.
A with-profit policy can include an investment component that can generate annual bonuses based on how the fund performs.
Whole-of-life insurance vs term life insurance: which is right for me?
Like with any other form of insurance, your life insurance policy should match up with your own set of personal circumstances. Primarily, your existing financial commitments and the amount of money you'd like to set aside for funeral costs and inheritance for loved ones.
With that in mind, here's a snapshot whole-of-life and term life insurance policy comparison:
| Whole-of-life | Term life insurance | |
|---|---|---|
| Length of policy | Lasts for life. | A set period of time, or if you die during the policy. |
| Type of payout | Guaranteed fixed sum, or additional potential bonuses with a with-profit policy. | Dependent on whether you buy a level term, decreasing term or increasing term life insurance policy. |
| Cost of policy | More expensive compared to term life insurance policies due to the assurance factor. With-profit policies tend to be the most expensive type of life assurance. | Cheaper than whole-of-life insurance. However, increasing tends to be the most expensive term life insurance and decreasing the cheapest. |
| Suitable for | Anyone looking to cover funeral costs and leave behind an inheritance for loved ones. | Those looking to align life insurance cover to large financial commitments, such as a mortgage. |
With whole-of-life insurance, you're not taking out an insurance policy to cover you "in the event of your death". As it's essentially life 'assurance', it acts to offer cover when you die.
This type of policy offers a guaranteed payout for your family and loved ones after you die outside of any inheritance. A pay out can even benefit from some tax breaks, as you can list it separately from your assets for inheritance.
Term life insurance is typically used to mirror the length of large financial commitments such as a mortgage. Say, for example, you have a mortgage term of 25 years.
A term life insurance policy can be aligned to a mortgage to ensure that if you die during the policy, the insurer will pay out to cover the financial commitment.
What are the two types of whole-of-life insurance?
Non-profit whole-of-life insurance is also known as a standard or balanced policy. This type of policy is generally known as the low-risk, fixed whole-of-life insurance option. You'll need to complete a medical questionnaire when you apply for a policy.
If you're approved, you'll pay the same stated premium in your policy for the rest of your life. If you continue to keep up these payments, your beneficiaries will receive a guaranteed pay out when you die.
With-profit whole of life insurance, or a maximum/investment-linked policy, tends to be the more expensive option. This is because a policy is linked to an investment fund. An insurer will invest your premiums into the fund in the hope it will perform well and generate extra cash value.
However, potential returns aren't guaranteed, so there is a level of risk that a with-profit policy does not offer a return on investment. An insurer will also typically have the option to change your life cover depending on the performance of the fund. This can affect the cost of your premiums and the eventual financial pay out.
It's also important to stress that with-profit policies can be complex financial products. So, it's important to seek out independent financial advice (IFA) if you're considering this type of policy.
How to get the best whole-of-life insurance quotes
The cost of your life insurance premium is calculated using various factors, including your age, medical history, lifestyle and the amount of cover you need.
During the application process, you may be required to complete a medical questionnaire. It's crucial to be completely honest and transparent when answering these questions, as lying can carry pretty major consequences with it, such as:
- Your application may be rejected
- Your life insurance policy may be cancelled
- Any false claim can be rejected
- Your beneficiaries receiving a lower pay out upon your death
Whole-of-life insurance is typically more expensive compared to term life insurance, but there are ways to keep costs down.
Comparing life insurance quotes between multiple providers using a comparison website, such as Uswitch, can help you find the best policy for you.
Beyond comparing quotes, buying a policy when you're younger can be more affordable compared to buying life insurance when you're over 50.
This is because as you get older, your risk of dying during the policy term increases. This increased risk is factored in by insurers when calculating your premium and can result in higher monthly payments.
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