Whole of Life insurance guarantees to pay out in the event of death, whenever it occurs. For a given premium, cover is provided for your whole life. The premium you pay can also include an investment element which could provide a cash-in value should the cover no longer be needed in future.
How the Insurance Benefits are Paid For:
A premium is charged based on the cost of providing the cover, the clients age and health situation. There are various types of whole of life insurance:
Whole of life With Profits - the premium includes an investment element which participates in the insurer’s with profits fund. The investment element helps the policy to keep pace with inflation, and whilst the bonus rate cannot be guaranteed, once added to the plan the bonus cannot be removed. The cover is suitable for those who wish to provide a tax free lump sum on death, or those who have a potential inheritance tax liability. The cost of the cover is set based on the client’s age and health, and takes into account the insurers expectations of investment performance and expenses.
Unit Linked whole of life policies - the premium is split between providing for the cost of the insurance cover, and investing into the insurer’s funds in order to subsidise the cost of cover in later years. The value of the investments and income from them may go down. You may not get back the original amount invested.
There is a choice over the level of death cover - Maximum, Minimum or Balanced. This can be changed as required, throughout the life of the policy. Each monthly premium is used to buy units in a selected fund, then sufficient units are cancelled to pay for the cost of the life cover. The remaining units are invested depending on the level of cover chosen.
Maximum cover provides the cheapest cost of the insurance but includes only a minimal investment element. Minimum cover is the opposite, with greater emphasis on investment and little life cover. Balanced cover falls between the two with the ratio of sum assured to premium being designed to sit at a given growth rate sufficient to maintain the level of cover throughout the life of the policy.
The premiums on a unit linked whole of life policy are generally reviewed after the first ten years, and more frequently thereafter. This is because the cost of providing life cover is more expensive as you get older. The aim of the premium review is to ensure that the fund value built up is sufficient to enable the life cover to continue at the same level, otherwise the premium would have to increase, or the level of cover would be reduced.
It will be appreciated that it is therefore possible to pay a premium within a wide range for a given sum assured.
If cover throughout life is needed with some assurance of the level of the premium, then balanced cover would be chosen. If the highest sum assured is required for the lowest premium, maximum cover (minimum investment) would be chosen. If a low sum assured but a high savings element is needed, minimum cover (maximum investment) would be chosen.
At the end of an initial period (between 7 and 10 years) the insurance company will review the premium to sum assured ratio. Where maximum cover is selected, either the premium will increase significantly or the sum assured will reduce. Where balanced cover is selected the review will still take place, but only if the insurance company has failed to meet its target rate of growth will it be necessary to alter the premium or sum assured. Further reviews then take place, usually every 3-5 years. Flexible Whole of Life Assurance plans usually have other features that may allow the sum assured and/or premium to be index linked, or otherwise increased, in pre-determined stages.
Plans can be written on a single life or joint lives, where the sum assured is payable on the first death (or diagnosis of a critical illness) or on the second (usually used for inheritance tax (IHT) planning).
As these plans have an element of savings, insurance companies can market them as a means to provide future funds. The charging structure of such plans, however, means that they may be poor value savings vehicles and they may be best used to provide cost effective protection against death or illness. Where a significant fund is established, however, it is possible to use this to pay future premiums, so a plan could be made “paid up” with all future premiums being paid from the accumulated fund until this runs out. When the insurance is no longer required, one simply ceases to pay the premium. A surrender value may then be payable.