‘Whole of Life’ insurance will pay out a sum assured on your death. Unlike ‘Term Assurance’ which is only for a specified number of years or to a certain age, ‘Whole of Life’ insurance is exactly what it says on the tin, it goes on for as long as you do!
One of the most common uses of a ‘Whole of Life’ plan is to provide a sum of money to children after the insured (often mum and dad!) have passed away, to cover the costs of any inheritance tax liability.
Guaranteed Premium Policies
There are typically two types of ‘Whole of Life’ policies. First, is the ‘guaranteed premium’ version, which is where you tend to have a sum assured that you pay a ‘guaranteed premium’ throughout your life, meaning there are no changes to the cost each month.
A useful feature often available is to apply indexation. This allows the amount of cover to increase with the retail price index (RPI) for a corresponding increase in premium.
Maximum Cover Plan
The second type of ‘Whole of Life’ policy is often referred to as a ‘maximum cover plan’. In this version, the monthly premiums paid into the plan are invested and then the cost of cover along with policy charges are deducted on a monthly basis.
The premium being invested, hopefully, dependent on market conditions and returns, will provide the plan with a value at the end of a specified period, usually 5 or 10 years. At this point, the insurance company will review the plan and look at the new cost of providing the life insurance for you. It’s important to bear in mind that you will be older at this point, and therefore the cover will be more expensive.
At the review date, the plan will be reviewed offering you a new premium that will provide the same level of cover, or you can continue your existing premium to provide a lower level of cover. The policy then would be reviewed again every five years (subject to each provider) thereafter, and you would go through the same process of either increase premium to maintain the level of cover or keep the premium the same and accept a lower level of cover.
One of the issues with a ‘maximum cover plan’ is that as you get older the premiums may become prohibitively expensive compared to a guaranteed plan, which is typically more expensive at the outset but remains the same throughout life. This is where the value of taking advice on the type of plan that best suits your needs is key.
As with most insurance policies these plans can be taken out on a ‘single life’ basis or ‘joint life’ basis. If you chose the latter, you would also have the option for the policy to pay out on either a ‘first death’ or ‘second death’ basis.
If you are looking to cover an inheritance tax liability, we would encourage you to work with an adviser in order to calculate your liability correctly. They will be able to advise on the type of ‘Whole of Life’ policy you need, whether this should be set up on a ‘first death’ or ‘second death’ basis, and what kind of trust would be suitable for your needs & estate.
‘Whole of Life’ plans are often associated with tax planning, and at Informed Financial Planning we would always recommend that you seek financial planning advice if you are looking to implement this type of policy. Please do not hesitate to contact us if this is something you are thinking about on 01482 219325 or email [email protected].
By John Copsey, Chartered Financial Planner.
Risk Warnings:
- If the sum assured is fixed, the value of the sum will be reduced in real terms by inflation (unless the plan includes indexation)
- If premiums cease to be paid, clients may suffer loss of cover
- Clients may pay more in premiums than the amount of the sum assured, depending on how they live
- Clients should be aware that different providers underwrite risk differently. This may lead to certain policy exclusions or amendments in policy terms. Clients should familiarise themselves with policy features & benefits prior to entering any contact
- Maximum cover Whole of Life policies contain an investment element therefore capital is at risk
