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In this article, our expert team of independent financial advisers at PIL Southampton delves into the topic of whole of life insurance policies, explaining how these policies work and what you should consider when you’re deciding how much you might cover you might need.
Whole of life insurance, also referred to as life insurance, describes a policy that is guaranteed to pay out when you die, as long as you are still paying premiums at the time of your death. You can take out this type of insurance policy at any age.
Term life insurance has a fixed end point which is usually a key life stage milestone like your mortgage ending or your children leaving full-time education. It pays out if you become terminally ill or if you die. The term for this type of policy can be anything between five years and 70 years.
With whole of life insurance on the other hand, the policy is for life, only ending on your death. If you stop paying premiums before you die, there will be no payout.
There are two main types of whole of life insurance policy: balanced cover and maximum cover.
With a balanced policy – also known as a ‘level’ policy – your premiums are guaranteed to stay the same throughout the policy, even if your circumstances, like your health, change dramatically. As your premiums stay the same, the guaranteed sum that will be paid out is also fixed.
With a maximum cover policy, your insurer invests your premiums in an investment fund, with the aim of the returns it hopefully generates being enough to cover their payout. When these investments are periodically reviewed, if they have not performed to their expected level it could mean that your insurer increases your premium or reduces the payout your loved ones will receive when you die.
Because the payout is not guaranteed and fixed, a maximum cover policy tends to start off with cheaper premiums than a balanced whole of life policy. However, the premiums do tend to increase over time, and these increases can be substantial.
A whole of life policy gives you the peace of mind that your loved ones will be taken care of financially at what can be a very difficult and vulnerable time. It could be used as a financial cushion, to pay the bills, to pay for your funeral or to pay inheritance tax.
We never know what the future holds – you may be hoping that your loved ones inherit your home when you die, but it could be that you have to sell your home to pay for care home fees in later life. This would mean that your loved ones could inherit a lot less than you had planned.
However, a whole of life policy guarantees that a lump sum will be provided for your loved ones when you die, no matter what happens to your assets.
Every individual’s situation is unique to them. Yes, there are benefits to a whole of life insurance policy that we have already mentioned. However, the fact that the payout is guaranteed means that the premiums are generally higher than those for a term insurance policy.
Before you take out a whole of life policy, be sure to know exactly how much the plan will cost, what the payout will be, and whether it definitely suits your needs.
Think about whether you will be able to keep up the premiums until you die as, if you don’t, there will be no payout.
Before coming to a decision, you should also consider any other death benefits you may have in place, your savings and investments and your partner’s assets and income.
When you are calculating how much whole of life cover you need, think about what your loved ones will be using the money for, both for their day to day needs from household bills to private school fees, and to potentially pay off debts like a mortgage, a car loan or credit cards. You may also want them to have an amount to keep for the future.
In addition, consider if you will need the lump sum payout to include your funeral costs and/or an expected inheritance tax bill.
Inheritance tax is a motivator for many people taking out whole of life policies – many people who believe their estate is likely to exceed the £1million IHT threshold (for married couples and civil partnerships) choose to take out a whole of life insurance policy to cover their expected IHT bill. This is because any amount above the £1million threshold could be liable for 40% tax.
At the time of writing, pension funds are not included in an estate. However, when the Inheritance Tax rule changes come into effect in April 2027, this will no longer be the case and pension pots will be included.
This change is likely to mean that many more estates will exceed the £1million IHT threshold for married couples and civil partnerships, which could mean that more people turn to whole of life policies to provide the funds to pay their IHT bill.
From the time you take out your whole of life insurance, your circumstances may change as you go through life changes like an increased mortgage, children’s needs, or your estate growing which could mean a bigger inheritance tax liability.
It could work the other way too; you may come into an inheritance that reduces your outgoings and liabilities.
Either way, keep the amount of cover you have taken out in mind as your circumstances change, and adjust your amount of cover accordingly.
It depends on various factors including how much money you would like your loved ones to receive, your occupation, where you live, how old you are, your state of health and your lifestyle.
Yes, you can. There is no limit to the number of whole of life insurance policies you can take out in the UK, and you can take them out across various providers too.
No, there is no expiry date. As long as you keep up your premiums, your policy will continue until you die.
For life, if it is to remain in force. To ensure a payout on death, you must still be paying the policy premiums.
For many people, the older they get the fewer financial commitments they need to cover when they die. For example, your mortgage may have been paid off and your children may have left home and be financially independent.
It could be that term life insurance fulfils your needs, being a safety net for the times your loved ones would be most likely to need financial assistance if you are no longer there to support them.
Although a whole of life lump sum insurance payout is tax-free, it will be counted as part of your estate unless it is held in trust. If the policy is not held in trust, the lump sum could therefore potentially be liable for inheritance tax.
If you think your estate may be liable for inheritance tax, you could take out a whole of life insurance policy in trust to pay the tax bill. Because it is held in a trust, it won’t be included in your estate which means it won’t be subject to probate and can be paid out more quickly.
The range of options can be overwhelming when you are making decisions about whether whole-of life insurance is right for you and, if so, how much you might need. Our friendly team of experienced, independent financial advisers is here to support you, guiding you through this process and helping you to make the best choices to suit your individual circumstances.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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