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Whole life insurance

The ins and outs of whole life insurance to help you know where to start

Whole life insurance is designed to provide cover for an individual's life, and pay out a lump sum when you die. However, whole life insurance differs from term assurance, because term assurance is only taken out over a certain amount of years. If you die within the term the insurer will have to pay out, and won't have to if you don't. With whole life insurance however, your beneficiaries are guaranteed a cash sum when you die.

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• You will need to pay premiums throughout your life or until you reach a certain age, when premium payments could stop but your cover continues.
• Whole life insurance policies are generally more expensive than life assurance because the insurer will definitely need to pay out in the event of your death.
• The amount paid out is tax-free and your loved ones can use it in any way they like.

Two types of whole life insurance cover exist:

• Maximum cover - The initial premium and the sum insured are guaranteed not to increase for the first 10 years. After this initial period the plan is reviewed and your premiums may be increased.
• Balanced cover - This aims to balance the level of life insurance you require with enough investment to support how much you will need in later life. The amount you will have to pay will depend on the sum to be insured, your age and your general health. Premiums for women are generally lower because they tend to live longer.

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• Life Fund Historic Performance: Check the historic performance of the insurance company's life funds. Poor previous performance could indicate a greater likelihood that future performance may also be poor, meaning monthly premiums may have to increase in order to maintain the same level of life cover.
• Investment Growth Rate Required: For balanced cover check the investment growth rate used to calculate your premiums. The lower this rate the better as this rate defines the minimum growth rate required by the investment in order to maintain premiums at the same level.
• Critical Illness: a lump sum is paid in the event of diagnosis of certain critical illnesses. You can save money by combining term insurance with critical illness cover. However, depending on the policy type, this may provide a single payout should death follow a critical illness diagnosis, rather than two payout's if cover is obtained separately.
• Waiver of Premium: if illness prevents you from working your monthly premiums are paid on your behalf for after a set deferment period. Check the quotes Key Facts documents for each quotation produced.
• Trusts: can the policy be set up in a trust? This can avoid delays in money going to dependents and can avoid the risk of having to pay inheritance tax.

The terms and conditions of Whole of Life Insurance policies vary, so make sure you understand the scope of the cover being offered before committing yourself.

Why should I take out whole life insurance?

• To pay for funeral expenses so your family won't have to meet the costs
• A guaranteed sum of money is paid out when you die
• Consider if you want to definitely leave money to your loved ones
• You can combine it with term insurance if you want to cover any debts
• To help any dependents maintain their standard of living
• If you have a significant estate it could be used to pay your inheritance tax bill before it can be passed on

Before you begin

• You may need to have to have an examination by a doctor to determine your state of health. If you are in poor health the insurer may increase your premium, offer a low level of cover or decline your application
• You may receive yearly bonuses depending on the insurer. You may also receive a final bonus payment that could be added on the event of your death.
• The terms and conditions of Whole of Life Insurance policies vary; so you need to make sure you understand the ins and outs of your cover being offered before signing on the dotted line.
• Your policy must be appropriate for your circumstances and requirements.
• Speak to an independent financial adviser
• How much you want your beneficiaries to be paid on the event of your death
• Decide how much you want to be covered for
• Think about how much you can afford to pay

What to watch out for?

• Don't be swayed by free gifts, free holidays or initial cover if you take out a policy
• Some policies won't ask you any medical or health questions
• Plans that guarantee your premiums will never rise for the life of the plan