Whole Life Insurance

If you decide to take out whole of life insurance, you’ll choose what level of cover you want and then pay your insurer, usually in monthly premiums. When you pass away, providing you’ve kept up with your premiums, your dependants can claim on the policy and receive a tax-free lump sum pay out.

Usually you will need to pay premiums for the rest of your life, but there are some types of whole life cover, such as over-50s policies (see more below), that allow you to stop paying once you reach a certain age while maintaining your cover until you die, whenever that may be.

There are two main options for this type of plan:

Whole of life insurance cover

Standard whole of life insurance cover will pay out a guaranteed, tax-free lump sum when the policyholder dies. Premiums are paid monthly or annually and can be fixed for life. Sometimes premiums are index-linked, which means they’ll rise over time in line with inflation. Policyholders must continue to pay the premium for their whole life. Bear in mind this could become more difficult after retirement if your income drops, for example. With standard cover premiums are priced based on a range of risk factors, such as your age, state of health and any pre-existing conditions. Policies have no cash value.

Over-50s life insurance

In contrast to standard whole of life insurance, with an over-50s life insurance plan you’ll be guaranteed to be accepted (as long as you are over 50), so there is no need for medical screening. These types of plans are designed to pay out a much smaller lump sum on the death of the policyholder, usually with the aim of covering funeral costs. You choose the amount of the lump sum payout you want and pay premiums accordingly. Premiums will usually be paid for life, although with some plans they may stop after you have paid them for a very long period of time. As with standard whole of life policies, you can choose to inflation-link your payout (and premiums will also rise with inflation). Policies have no cash value.

Life insurance is important if you have children or other dependants who rely on you financially. If you want to ensure your loved ones would receive a guaranteed pay out no matter when you die, whole life cover might be for you.

It can also be worth considering if you are concerned about Inheritance Tax (IHT). If your estate is worth more than £325,000, IHT is charged at 40% of the value of the estate above that threshold. This will need to be paid before your loved ones can access the estate which can result in them having to stump up thousands of pounds in one go. The pay out from a whole of life insurance policy written ‘in trust’ can help cover this IHT bill.

When a policy is written ‘in trust’ the proceeds are excluded from you estate and pass intact to your beneficiaries straight away. Your insurance provider can arrange having the policy structured in this way, and it should require nothing more than a signature on your part.

If you only want life cover in place until. for example, your children are old enough to be financially independent, you might prefer to choose term insurance and only have cover up until a date that suits you.

Whole life insurance is generally more expensive than term insurance simply because it guarantees a payment no matter when you die. With a term insurance policy, if you survive to the end of the term, the policy expires and has no value, and you receive nothing.

The amount you pay for your whole life policy will also depend on factors such as:

• your age
• your health (including any pre-existing conditions)
• whether you smoke or vape
• the amount of cover you require.

There are a number of factors to weigh up when considering whether to take out a whole life insurance policy. And it’s important to consider them carefully as whole life cover can be expensive. With some types of policy, premiums can also rise considerably over time, making them less affordable.

Here are some questions to consider:

• Do you want a guaranteed payout for your loved ones so you can leave them a lump sum after you die?
• Do you want to leave money to help beneficiaries pay a potential inheritance tax bill on your estate? (you may need tax and estate planning advice if you need to put the life insurance policy in a trust for IHT planning purposes)
• Do you want to leave money to help pay funeral costs or to help beneficiaries with clearing and selling your home, for example?
• Will you be able to afford the premiums in the future (if you opt for a policy where premiums are linked to inflation and could rise)?

It’s important to weigh up the potential benefits against the cost of premiums – and future premiums – to ascertain if this is the right type of policy for you.

Whole of life and term insurance cover cater for different needs, so which one is best will depend on circumstances.

While the guaranteed lump sum payout with whole-of-life cover is appealing, policies can be expensive. If you live well into old age you may end up paying premiums for many years on a whole life policy, only to find that your dependants, now as adults themselves, no longer want or need the large payout.

Term insurance cover protects family members financially should you die within a fixed time frame – the term. It can offer valuable peace of mind, for example while you’re paying off a mortgage, and premiums can be fixed from the outset and are often competitively priced. But if you live beyond the term there is no payout or return of your premiums.

It is possible to get a whole of life insurance policy with pre-existing medical conditions or if you are in poor health. However, you may need to speak to a specialist broker and you should expect to pay a lot more in premiums. There may also be conditions attached to the cover.

Depending on your age and circumstances, over-50s guaranteed acceptance life cover might be an option for you. As the name suggests it is targeted at the over 50s, but crucially it does not involve a medical screening. Every applicant, even those with health conditions, is accepted. It is important to note, however, that there won’t usually be a pay out with these plans if you die within the first year of cover.

One of the main alternatives to whole-of-life cover is term life insurance which, as mentioned earlier, pays out if you die within a set term.

You can choose from:

• level term insurance: where the amount of cover and your premiums stay the same for the length of the policy
• decreasing term insurance: where the amount of cover falls in line with an outstanding debt such as a mortgage and is therefore a cheaper option
• increasing term insurance: where the level of cover increases over time to protect your policy’s value against inflation. Note that your premiums will also rise over time

Another option is family income benefit which pays out a monthly tax-free income to your family if you die within the term of the policy, rather than a lump sum. This can be a more manageable and more affordable option if you’re concerned about the cost of life insurance. You can read more about family income benefit in our guide.