What is whole life insurance? Life insurance is a way to make sure that if you pass away, your family will get a big payout.
This is especially important if you’re the main or only breadwinner in your family since your death could leave them without a lot of money.
When you get life insurance, you pay regular premiums each month or year, and the insurance company agrees to pay you a big payout if you die while it’s still active, as long as you follow all the rules.
A whole life insurance policy ensures that an insurer will give you a big payout when you’re gone, no matter when it happens. This type of policy is sometimes called life assurance.
What’s the difference between whole life insurance and term insurance? Well, term insurance is usually set for a certain amount of time, like 25 years for your mortgage, and it ends when you pass away.
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Once it’s over, you don’t get any cash because you only get paid out if you pass away during the term. So if you want to keep getting coverage, you’ll have to get a new policy.
How does whole life insurance work?
You can purchase a whole life policy with monthly or annual contributions or a lump sum, and you’ll be covered until you pass away (as long as you’re paying the premiums). Some policies are designed so you can stop making contributions when you hit a certain age (e.g. 90), or after a certain period (e.g., 30 years).
The two main types of whole life cover are:
1. Balanced cover
In the case of balanced or standard coverage, your premiums will remain fixed throughout the term of the policy. This means that you will continue to pay the same price as you age, even if you begin to experience health issues. Also, the payout will remain fixed, and you will agree with your insurer on the amount at the beginning of your policy.
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2. Maximum cover
A maximum cover policy has an investment fund attached to it. Your insurer will put the money you deposit each month into the fund with the expectation that the returns will pay out.
Investments are usually made into:
- A ‘unit-linked fund’ is made up of units of stock, bonds, real estate, and cash.
- A ‘with-profits fund’ is a fund in which your money is invested with other investors’ funds in stocks, shares, shares, bonds, and real estate over a specified period.
Your insurer will hold fund reviews regularly. They will review whether the fund is doing well enough to pay out. If the fund is not doing well, they may ask you to increase your premiums or reduce your cover amount.
What does whole life insurance cover?
Like term life insurance, whole life insurance provides a death benefit that beneficiaries can use for any reason they wish.
This could include funeral expenses, debts, inheritance taxes, mortgage payments, or anything else that could be affected by loss of income in the event of death before retirement age.
A joint life insurance policy covers two people but only pays out for one death and is intended to protect the financial position of the remaining members of the couple.
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The policy typically provides a lump sum payment that can be used to repay a mortgage or to cover other debts or financial obligations.
Some policies offer discounts in the early years to make the policy cheaper at the start. Others offer add-on cover that can be accessed early if you are unable to take care of yourself due to an illness or dementia.
If you’re tempted to try for payouts before you pass away, review your policy terms first. The surrender value may be substantially less than the premiums you’ve paid over the years, and there may be associated fees.
What does whole life insurance not cover?
The specifics of what a whole life policy covers will vary depending on the insurer and the type of life insurance policy you select. For instance, certain causes of death may not be covered under certain policies.
It’s important to read the fine print and understand any exclusions and restrictions, or your family members could be left with less coverage than you anticipate.
How much does whole life insurance usually cost?
Whole life insurance can vary in price depending on several factors, including age, height and weight, employment in high-risk occupations, and smoking. However, the main factor is likely to be how much coverage you want.
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Whole life insurance is one of the highest-cost forms of life insurance because of the guaranteed pay-out.
According to industry research, the average monthly premiums for whole life insurance are £40.68 per month at 30 years of age; £62.43 per month at 40 years of age; and £106.28 per month at 50 years of age.
When you compare the cost of whole life insurance to the national average price of life insurance, you’ll find that a person aged 30 will pay 640 times more for whole life insurance than a person aged 30 years of age for a 30-year mortgage life insurance, and a person aged 50 will pay 225 times more for a whole life policy than a mortgage life policy.
Is a whole life policy worth it?
The main benefit of whole life insurance is that it guarantees a payout. This means that, in the event of your death, your family will receive a fixed, lump sum of money when you pass away.
However, this usually means that you pay a higher premium for this type of policy. Some whole life policies only offer you life insurance, while others are tied to an investment, which is a form of equity.
As the fund grows, you can cash in on some of its value.
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Your death benefit won’t be affected by withdrawals, as it’s designed to be a stand-alone benefit for you to take advantage of, and if it’s a qualifying policy, you won’t have to pay taxes on your withdrawals.
In addition to the benefits of a whole life policy, it can also protect your family in the event of an inheritance tax claim. Inheritance tax is currently charged at 40% on an estate of more than £ 325,000.
The main reason why life insurance payouts are liable to inheritance tax is because they are added to your estate, and if all of those payouts go over the income tax threshold (IHT threshold), then inheritance tax is payable at 40%.
However, you can avoid this tax by placing your policy in a trust. This could make all the difference to your dependents.
However, trusts are an area of specialist knowledge, so it is important to speak with a financial adviser and a solicitor before setting up a trust.
How can I get the best deal on a whole life insurance policy?
It’s always a good idea to shop around when it comes to life insurance. If you take out too much, you could end up paying way more than you need.
But if you don’t know how much you need, it could mean your family won’t have enough money when you’re gone.
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Think about what kind of payments they’ll need to cover, how much money they’ll need to live a comfortable life, and how their income will be impacted if they pass away. When you’re looking for a whole life policy, ask yourself these questions:
- Amount of cover: How much do you want to pay? For whole life insurance in the UK, most insurers will allow you to opt for a lump sum, but the bigger the sum, the higher your premiums will be.
- Your age: This could influence the cost of your monthly premiums. The higher your age, the higher the cost of your entire life insurance policy.
How is whole life insurance paid out?
A whole life insurance policy pays out a lump sum of money at the time of the policyholder’s death, whenever that may be.
Beneficiaries should get in touch with their insurance company as soon as possible following the insured person’s death and must have all the necessary documentation to back up their claim.
There are three main stages in the life insurance claims process:
1. Notification
This is the first time you’ll call the provider to begin the life insurance claim process. Beneficiaries will need your policy number, your name, your relationship with the policyholder, and your doctor’s contact information.
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2. Pay-out
Once all the formalities have been taken care of, the named beneficiary receives the payment. Generally, life insurance payouts are subject to inheritance tax (40%) if the total value of the deceased’s estate is more than £ 325,000 (unless the policy is entered into a trust).
3. Assessment
In most cases, you’ll need to fill out a claim form and send it back to the insurance company. Depending on what type of claim you have, they may request more information, like a death certificate.