Is Whole of Life Insurance Worth it?
Whole of life insurance is life insurance boiled down to its simplest level – you pay a premium for your policy every month and then when you pass away (no matter when that is), the insurance company pay your family a lump sum to give them financial security.
There are no complicated terms, no strange investment side issues, and no changes in the sum assured. Pay every month, relax with guaranteed cover.
But is life insurance at its best when it’s this simple?
The meaning of life assurance and whole of life assurance
Insurance advisors like to brush off the difference between the words ‘assurance’ and ‘insurance’, often simply saying they are two terms for the same thing, but in this case, that’s not quite accurate.
Assurance comes from the word ‘assure’ which means it is certain to happen. Insurance, on the other hand, means to protect against a possible (but not always certain) thing.
When life insurance is a whole of life policy (WoL), the payout is certain and it is correctly termed life assurance.
This differentiates it from a term-based policy which runs out after a certain number of years – this type of policy should be correctly labelled ‘life insurance’.
Term life insurance is often preferred because of the enticing affordability of the premiums for large levels of payout amounts. In contrast, whole of life policies can seem expensive.
The reason is one of assurance. No matter what happens, your whole of life cover will pay out. Sadly, death is guaranteed and there’s no defined end date to the policy, but the insurance company is committed to pay out, no matter how old you are when you pass away.
A term policy will run out one day – therefore, it is seen somewhat as a gamble by the insurance company – both they and you are hoping that you will outlive the policy and there will never be a payment made on it. Insurance companies can afford to offer enticing premiums based on this gamble. If an accident happens and they have to pay out, then they do financially lose out, but thankfully for everyone involved, most term policies pass without any payment being made.
For a whole of life assurance policy to be financially viable, the premiums must be set high enough to overtake the value of the sum assured before the policy is called upon.
The maths for whole of life policies are quite easy. Simply take the sum assured (the payout amount), divide it by the premium cost and you will see how many months you have to pay before the amount you have paid in is more than you will get out.
For example, if your policy pays out £50,000 and your premium is £100 a month, you will need to pay for 500 months (almost 42 years) before you have paid in enough to make it in the insurance company’s favour. Of course, if you take out the policy at 30, it is very likely that this will happen.
Life insurance should never really be considered an investment. You are paying for the security of knowing that the money is there for your family in the case of your passing, not because it’s a top-quality savings account.
In the above example, purely by the numbers, it could be argued that the whole of life policy was only worth it if you died before reaching 72, however the truth is that the feeling of security throughout your life is worth the cost alone.
Another way to look at it is with a savings account. If you had paid in £100 per month from your 30th birthday, then at 72 that £50,000 would be there (and you could use it even without dying!). However, if you had been victim of a fatal accident at 40, there would only have been £12,000 for your family in savings, rather than the £50,000 from the policy.
Note that all these examples ignore more complicated factors such as interest or inflation!
In the past (and in other countries, such as America), some whole of life policies were tied to investment savings accounts, meaning you could draw on them later once a certain term was passed (typically in retirement). These investment insurance packages are now very rare in the UK and are largely ignored, replaced by better financial systems for pensions and other retirement packages.
The benefits of whole of life cover over other term-based alternatives centre on the fact that your policy will definitely pay out, no matter when you die. With that guaranteed, whole of life policies are typically used for situations that are not likely to change.
For example, a life insurance policy put in place to cover a mortgage is better designed as a term-based package that lasts until the mortgage is paid off (after which time it is no longer needed), but cover put in place to pay for funeral expenses works best as a whole of life policy as that will always be a consideration.
Whole of life cover and inheritance tax
Whole of life assurance is also best used to cover an inheritance tax bill. By using a life insurance policy set up to be put in trust for the explicit use of paying inheritance tax, you can guarantee the safety of your home and other parts of your estate for your family. Without this cover, heirs are often put in the upsetting position of having to sell the house in order to pay for the inheritance tax.
A brief summary of the pros and cons of whole of life assurance
- Your policy will pay out – no end of term
- Easy to understand
- Good for trust fund inheritance or inheritance tax
- Perfect for covering smaller costs incurred through death, such as funeral expenses
- More expensive than term-based life insurance
- You could pay in more than you get out
One version of whole of life insurance is specialised over 50s insurance. These policies are whole of life-based cover which have no medical questioning and are guaranteed acceptance – as long as you are over 50, you will be able to get cover no matter what.
Designed mainly for covering funeral expenses, over 50 policies are slightly more expensive than standard whole of life cover but are an excellent alternative for anyone with a medical condition that might make it difficult (or even impossible) to get affordable rates on other types of insurance available.