There are two main types of life insurance: term insurance and whole-of-life assurance.
Term insurance is the most popular and pays out a regular income or lump sum if you die within the policy term. It’s called ‘insurance’ because you’re taking out insurance against something that might happen during a certain period.
Whole-of-life assurance is different because your family can make a claim whenever you die. In other words, a claim is assured, hence the name, and the policy is guaranteed to pay out at that point, whenever it might be.
Whole-of-life assurance is more expensive than term insurance because a claim is inevitable. You should therefore compare prices and make sure you can meet the cost – and remember that you could be paying the premiums into your 70s and 80s (most policies are structured so that premiums need no longer be paid beyond a certain age, such as 85 or 90).
Term insurance is the most popular and pays out a regular income or lump sum if you die within the policy term
Terms and conditions
It’s also important to read the small print of the policy carefully as whole-of-life insurance comes in various shapes and sizes. So if you don’t fully understand the term and conditions, you could be in for a shock.
Some whole-of-life plans charge fixed premiums for a fixed amount of cover. In other words, you know how much the policy costs and the sum assured at the outset. A number of plans also charge fixed premiums up to a certain age, perhaps 65 or 70.
The cover then continues but you no longer have to pay, which can be handy if you have retired.
But most whole-of-life plans are linked to an investment fund, which means the premiums and the sum assured are typically fixed for 10 years, but are then regularly reviewed. If the investments are not performing well, the insurance company can either put up the premiums or reduce the sum assured.
You could therefore end up with life insurance that is either unaffordable or inadequate.
You can often choose how much of the premium is invested in the fund – and the amount you invest will affect the initial premium rate and the risk of a future hike.
‘Standard’ or ‘balanced’ cover is the most common because the premiums are calculated on the assumption that no future rises will be necessary. But remember there are no guarantees.
If you decide you no longer need whole-of-life cover you can often cash in the policy. However, the so-called ‘surrender value’ is often a lot less than the total premiums, particularly during the early years.
Who needs it?
Whole-of-life cover does not suit everybody. You might, for example, have no need for life insurance in your 80s as you will probably have no mortgage or dependent children.
However, some people like to provide an inheritance for their loved ones, if only to cover their funeral costs. Many people also choose to take out whole of life insurance in order to meet a future inheritance tax bill.
Writing a policy ‘in trust’
The proceeds of whole of life insurance do not usually attract income or capital gains tax, but your family could be liable for inheritance tax (IHT) on the payout. You should therefore make sure that you write the policy ‘in trust’. The money will then go into the trust and will not form part of your estate when you die, so sidestepping any potential IHT liability.