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Whole of Life Insurance

'Whole-of-life' plans are life insurance policies, designed to provide a guaranteed payout on death. They pay out a lump sum to your dependents, which is usually tax-free. However, crucially, the amount of the payout is not generally guaranteed.

Typically, your contributions are invested into a fund and the life assurance benefits are 'purchased' from that investment fund. The performance of the fund has a significant effect on the amount of future benefits, however the life office (the Insurer?) will also take into account other factors, such as changing mortality rates and the possibility of reduced investment returns in the future.

The policy will usually have 'review' dates. At this point the life office will compare the actual value of the plan with the benefits it is to provide. This may result in either the life office asking the policyholder to increase their premiums or suggest keeping the premiums as they are but reduce the benefit payable on death.

Some policies require policyholders to continue paying premiums right up until death, or upon reaching a stated age, even though the cover continues until they die. There are also plans that can be put in place to provide cover for additional benefits, perhaps a lump sum payout to for the policyholder in the event of becoming disabled or on the diagnosis of a specified illness.

What to consider when taking out a Whole of Life assurance policy

There are three main options to consider under a whole of life assurance policy. These are "maximum cover", " balanced cover" or "guaranteed rate".

  1. The maximum cover option is the least expensive initially as the majority of the premium pays for the protection and very little is invested. However, the premiums will be reviewed at regular intervals subsequently, at which point either the premiums will increase, or the amount of cover will decrease to reflect the extra age attained.  The cost will therefore continue to rise for the rest of your life and over time is likely to work out the most expensive option.  Hence the longer you live the higher the premiums will become; for this reason we would not normally recommend this option.
  2. The balanced (or standard) cover option sets the premium at a level where it is assumed that there should be no need for future premium increases.  There is an investment element built into this option as well, however, it is more significant for the balanced cover option as it initially makes up a sizeable proportion of the premiums.

    The invested element of the balanced cover option is used in future years to subsidise premiums into old age.  Therefore, although the cost to the insurer of providing the cover will rise over time, the actual premiums that you pay will remain static.  As long as the invested element has provided growth at a predetermined level, in the case below 6% per annum, when the 10year and subsequent reviews take place there will be no need to increase the premium level.

    The policy would attract a surrender value should you no longer require the cover, although this will be comparatively small in the early years and may be less than has been paid in. 
  3. The guaranteed rate offers a fixed premium for life; however, this is likely to be the dearest option initially as there is no form of investment at all hence there is also no cash-in value at any time.  Ideally this is the best option to pursue if you can afford it.

    The advantage with this option is that your cover and premiums are not dependent upon the performance of the investment and premiums are guaranteed to remain the same throughout

You can be protected from the taxation liability upon any residual estate by utilising what is known as a Whole of Life policy.  This policy runs for as long as necessary and should be written on the basis of the benefits paying out on the event of the Second death, as this is when the liability arises. Fortunately this also makes the policy much more cost effective, as the premiums are based on whichever of you is least likely to die soonest, statistically speaking.

Furthermore it is an added advantage to have the plans written under trust to ensure that, in the event of death, the proceeds fall outside your estate. The life insurance amount will pass to your nominated beneficiaries and can be used in the settlement of any IHT inheritance tax liability.

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