The benefits of taking out whole-of-life insurance
As the name suggests, whole-of-life insurance remains in place until you die, when the policy pays out a lump sum to your family. It is an open-ended, investment-based policy mainly used for inheritance tax planning.
This contrasts with the cheaper and more common 'term life insurance' which only covers an agreed period of time, often 25 years – perhaps coinciding with the period left on your mortgage, or the years when your children will be living at home – after which the cover ends. If you live for longer than the policy's term, you won't receive a penny.
Despite the obvious benefits of whole-of-life cover, relatively few people take out this kind of policy. It is more expensive than term insurance, and demands that you continue to pay premiums throughout your life. Many people simply decide that they don't need whole-of-life cover, because by the time they are old their dependants will have made their own way in the world and will no longer need their financial support.
When whole-of-life cover is worth its while
Inheritance tax could end up costing your loved ones hundreds of thousands of pounds in the event of your death, but there are ways of protecting them from this burden.
The most common reason why people take out whole-of-life cover is to help reduce their family’s tax bill, particularly inheritance tax, or IHT. With tax rules constantly changing, it's always worth paying for expert advice regarding this.
Inheritance tax is currently charged at 40% on all your assets above the threshold (£325,000), including your family home. This means that if you have assets worth £500,000, your estate pays nothing on the first £325,000, but then pays 40% on the remaining £175,000 – meaning a whopping inheritance tax total of £70,000. With a whole-of-life policy that is written in trust, the sum assured is paid into the Trust and does not form part of your estate for inheritance tax purposes. If the policy is not written into Trust the sum payable will form part of your Estate and will be liable for Inheritance Tax itself.
Things to look out for in the small print
Many insurance providers guarantee premiums and the sum insured for a period of, say, ten years – at which point they will review your plan and may increase your premiums. The most common complaint about whole-of-life cover is that people don't realise that their premiums will be reviewed at a certain point, and are shocked when they see their premiums increase. Read the small print and make sure you are prepared for any scheduled reviews.
Some policies demand that you keep paying premiums until you die, whereas with others the payments stop at a set age, even though you remain covered until you die.
Whole-of-life policies are also investment-based, so you need to compare the historical performance of each insurer's life funds – although of course this doesn't necessarily offer a prediction of how they will perform in the future. Basically, your insurer invests your premiums into a life fund containing a mixture of stocks and shares, cash, property and bonds. The proceeds contribute to paying your sum insured. If the investments perform badly, the insurer may hike up your premium to make sure you maintain the same level of cover (unless your premiums are guaranteed).
You could also think about taking out a waiver of premium along with your policy to cover your monthly premiums should you become ill and unable to keep up the payments.