Whole of Life Insurance

Whole of life insurance guarantees the payout of a lump sum whenever the policyholder dies, so long as the monthly premiums are maintained.
 
Because death is inevitable, it follows then, that premiums for whole of life cover are more expensive than for the alternative option of ‘term life insurance’.

Under whole of life cover, some of your monthly premiums are invested by the insurer into life funds. This means that both your premiums and your sum assured – which is the money paid out to your beneficiaries – can change.

Different types of whole of life cover

Whole of life insurance cover comes in two main forms – maximum cover and balanced cover.

Balanced cover is the most popular form of whole of life insurance. Under this kind of policy, half of the premiums you pay to the insurer each month are paid into an investment fund.  The other half are saved and put towards your sum assured.

Because it carries this investment element, balanced cover is also known as unit-linked whole of life insurance.  As balanced whole of life cover relies on the linked investment fund growing at a certain annual rate, poor performance of the fund – or even increased management charges over the years – could result in the premiums being inadequate. In this case, to maintain the same level of cover, premiums may have to be increased.

Maximum cover is when the initial premiums (as well as the sum assured) are guaranteed not to increase for the first 10 years of the policy. After this initial period, the plan is reviewed and, if it becomes necessary, the premiums may go up.

Maximum whole of life cover has been criticised in recent years after many policy holders were forced to pay out a lot more in premiums than originally planned – all to achieve the same result.

Pros and cons of whole of term life cover

Whole of life cover – also sometimes referred to as whole term life insurance – comes with distinct advantages and disadvantages. These must be weighed up when shopping around for the right life cover for you and your dependants.

The most obvious advantage of whole of life cover is that it pays out whenever you die. This is not like term life insurance which only pays out during an agreed term.

Conversely then, the disadvantage of this is that the premiums will be more expensive, and will take a bigger slice out of your monthly income. 

But the main stumbling block with a whole of life cover policy is that you will expose yourself to the risk of your premiums increasing. If you can’t afford to pay the potential extra required, you will not be covered and your previously-paid premiums will have been wasted.

It’s a good idea to check the historic performance of the insurance company’s life funds before buying a whole of life policy for your own reference. Poor previous performance could indicate a greater likelihood of future poor performance – but again there are no guarantees.

Whole of life policies are only suitable if you can afford to be flexible about the eventual payout to your dependants. If you can’t, a term insurance policy will be a better option.