Types of Whole of Life Assurance Explained

There are basically two types of life insurance in the UK:

• Whole of Life Assurance
• Term Assurance

The clues are in their titles:

• ‘Whole of life’ assurance is literally a life assurance scheme for the whole of your life and provided you pay the premiums for life, your loved ones or your estate are ‘assured’ there will be guaranteed pay out on death.
• ‘Term’ assurance means that the life insurance policy runs for a specific term e.g., 5 years, 10 years, 25 years etc.  Provided you pay the premiums for the term of the contract, your loved ones or your estate are ‘assured’ to receive a guaranteed pay out on death during the term.  This is why we technically call it life insurance as there is no guaranteed pay out after the end of the term, so if you have not claimed, the policy ends.  Just in the same way as motor insurance or household insurance.  Policies of insurance only pay out if there is a valid claim during the cover period.

Whole of Life assurance is usually more expensive as it is protection for the rest of your life provided premiums are maintained and some may have a future investment element built in.

Several types of Whole of Life Assurance:

• Conventional Whole of Life Assurance where the scheme is purely based on the sum assured at death, a mortality risk charge (premium). 
• There is usually no investment element and sum assured value on death remains the same.
• Flexible/Unit Linked Whole of Life Assurance where premiums paid are usually reviewed every 10 years and consist of the sum assured at death i.e., a mortality risk charge (premium) and an investment premium element.  The unit linked investment element will hopefully grow in the future to cross subsidise any increases in premiums that usually happen after the 10 year review
• Flexi W.O.L.  will usually be offered of 3 levels of cover for the premium that you pay.
• Maximum Cover – where most the premiums pay for life cover and only a small proportion of the premium is invest meaning a larger sum insured at the start but a great likelihood of increased premiums at the 10-year review.
• Standard Cover – where the premiums paid are shared equally between the life insurance costs and investment meaning a balanced sum insured at the start with a reduced likelihood of increased premiums at the 10-year review.
• Minimum Cover – where minimum premiums pay for life cover and the majority of the premium is invested meaning a smaller sum insured at the start and a much-reduced risk of increased premiums at the 10-year review.

Usually whole of life plans have level cover but can come with increasing cover although most people ending up reducing cover or increasing premiums at the 10-year review.

Guaranteed or Renewable?  Guaranteed cover means your premiums are guaranteed for the term of the policy and renewable cover meaning premiums will also increase.

Where and Why for Whole of Life Assurance?

• Family Protection.
• Mortgage Protection (not common)
• Inheritance tax liabilities and even as a big investment gift on death.
• Business protection for fellow shareholders, partners, or key persons (not common).

Whole of life assurance can also have other bolt-ons added such as critical illness insurance i.e., pays out not if you die but if you develop a serious, life changing or life-threatening illness or injury.

Whole of Life as an Investment for Loved Ones

We each have an inheritance gifting allowance of £3,000 pa.  You can give more away in a year but the first £3,000 of gifts is immediately outside the estate for inheritance tax purposes.  We took a look at some examples for you based upon single life, annual premium £3,000 pa, whole of life insurance set up in trust for loved ones:

• 50-year-old nonsmoker: £3,000 premium = £329,000 guaranteed rate, no premium increases and over £2m of cover for an annually reviewable policy.
• 60-year-old nonsmoker: £3,000 premium = £233,000 guaranteed rate, no premium increases and £900,000 of cover for an annually reviewable policy.
• 70-year-old nonsmoker: £3,000 premium = £131,000 guaranteed rate, no premium increases and £339,000 of cover for an annually reviewable policy.

What an investment that is for your loved ones.  E.g., Age 70, life expectancy say 20 years.  £3,000 pa x 20 years = £60,000 paid in premiums and a guaranteed pay out on death, in trust for your loved ones of £131,000 inheritance tax free.

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