Whole of life insurance

Help protect what's most important to you. 

Help protect what's most important to you. 

Kamran Altaf
Life insurance expert
7
minute read
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Posted 14 JUNE 2021

What is whole of life insurance? 

Whole of life insurance – sometimes called whole of life assurance – is a type of policy that guarantees an insurance provider will pay out a lump sum to your family when you die – no matter when that happens.

This is different from term life insurance, which only pays out if you die during the set term the policy runs for.

How does whole of life cover work? 

Whole of life policies usually have two elements:

  • one part of your money is used to buy life assurance
  • the other part of your money is invested, with the pay-out for this part depending on how the investment performs over the years.

You usually pay a monthly or annual premium. Insurance providers may review this from time to time and revise the amount you have to pay.

When you die, your beneficiaries (the person or people you’ve nominated on the policy) will get a pay-out. You’ll remain covered so long as you pay the premium.

There are some whole of life policies that let you pay for a fixed number of years or to a set age – for example, 90. You’ll still be covered until you die, but you won’t have to pay anything after the fixed period has ended.

What types of whole of life policy are there? 

The three main types of whole of life cover are:

  • Non-profit whole of life – This is sometimes called standard cover or balanced cover. Your premiums will stay the same throughout the length of your policy. The pay-out when you die will also be for a fixed cash amount, agreed with your insurance provider when you take out the policy.
  • With-profits whole of life insurance – the money from your premiums will be invested by your insurance provider. The aim is to make enough return to cover the eventual pay-out. If the investments perform well, bonuses are added to the value of your policy. If the investments don’t perform as well as hoped your premiums could increase to make up any shortfall.
  • Unit-linked whole of life insurance – you choose what unit-linked investment funds you want to put your investments in. Your monthly payments are based on how much you want the policy to pay out, so you might need to pay in more if your investments underperform. There’s usually a minimum amount the policy will pay out.

Compare the Market doesn’t compare whole of life policies. If you’re interested in life insurance we can help with level term insurance and decreasing term insurance. Speak to a financial advisor if you’re unsure.

How much can whole of life insurance cost? 

Whole of life insurance is usually more expensive than term cover because insurance providers know they’ll have to pay out at some point.

Like other types of life insurance, the price of your premium can be affected by many things:

  • The cover amount – this is likely to be the number-one factor, as you decide how much of a pay-out you’d like your beneficiaries to receive
  • your age – typically, the younger you are when you start your policy the cheaper it will be, particularly for investment policies, as this means there will be time for the potential profits to build up.
  • any existing health conditions
  • your medical history (and that of your family) and your lifestyle – for example, if you smoke.

Because you’ll need to pay your premium until you die, or reach an advanced age, you’ll need to consider whether you can afford it once you stop working.

How much could a policy pay out? 

Your lump-sum payment will depend on the specific details of your policy. Each policy is different and so the size of your pay-out will be too. But with a balanced-cover policy, you’ll need to decide on the pay-out at the outset. That means thinking about what you want it to cover.

Is a whole of life insurance policy right for me? 

A whole of life policy could be right for you if:

  • you want to leave your family a lump sum when you die
  • you understand that, if you opt for an investment-linked policy, the pay-out will depend on how it performs
  • you want a pay-out that could help cover inheritance tax if your estate is valued at more than £325,000

However, you might only want cover as financial security for a certain length of time; for example, when you have an outstanding mortgage to pay. In this case, you might find a term life insurance policy more suitable.

If you’re considering taking out a whole of life policy, it’s a good idea to speak to a financial advisor to check it’s right for you and that you understand the risk of any investments the policy uses. Advice is particularly important too, as with some whole of life policies you could face significant charges if you want to end your cover early.

Is a whole-of-life insurance pay-out tax-free?

When your family receive a lump-sum pay-out after your death, they won’t have to pay capital gains tax or income tax on it.

But they may have to pay 40% inheritance tax if the value of your estate is more than £325,000.

If you want to protect your life insurance pay-out from inheritance tax, you can keep it separate from the rest of your estate by writing the policy in trust.

Is whole of life insurance always guaranteed to pay out?

As long as your cause of death is covered under the policy’s terms and conditions, and you don’t miss any payments, the pay-out should be guaranteed.

It’s important to check which causes of death are covered before you take out a policy. Cover can vary between providers and some may have different exclusions and limitations. In nearly all cases, you’ll find that death due to alcohol or drug abuse won’t be covered.

Can I cash in my whole of life insurance policy early?

Some policies let you cash-in early and receive a smaller pay-out before you die. However, there can be high charges and a penalty. You might receive less than you’ve invested.

Just make sure you read the terms and conditions carefully and are fully aware of how much you might lose if you decide to cash in early.

Should I get term or whole of life insurance? 

The attraction of whole of life insurance is that you’re guaranteed a pay-out, so you’re safe in the knowledge that, whenever it happens, your loved ones will get a cash benefit when you die. However, because of this, you typically pay a higher premium.

 

And if you live to an old age, you may find a big pay-out is no longer needed because the financial situation of you and your loved ones has changed. You all might have paid off your mortgages, for example.

If you’re looking more for security, rather than simply a pay-out, term life insurance can provide that cover. It’s designed so there’s a pay-out that can be used to cover financial burdens, like a mortgage or other debts, if you die during the period the policy runs for. Because this type of insurance covers a fixed period, your monthly premiums are usually lower.

You may be able to lower them further by choosing a decreasing term insurance policy, rather than a level term. The pay-out for this type of cover will reduce over the course of the policy. It’s a popular option for those who want to use the pay-out to cover the balance remaining on a repayment mortgage.

Learn more about the different types of life insurance and how they work.

Can I get a joint whole of life insurance policy? 

You can, but not with Compare the Market. Instead, you could consider if joint life insurance would suit your needs. This is a policy for two people, but it will only pay out once, after the first person dies. 

Can I get whole of life insurance if I’m in poor health?

You might find it harder to find whole of life cover if you have a pre-existing medical condition That’s not to say it’s impossible, but it’s likely you’ll need to pay a higher premium to get the cover you want. 

Top tip

Always be honest about your health and lifestyle habits when applying for life insurance. If you don’t disclose important health information and your insurance provider finds out, they may cancel your policy.

How can I get whole of life insurance?

You can’t buy this type of cover on our site, although some over 50s life insurance policies also include whole of life cover.

Alternatively, our partner LifeSearch, a specialist adviser for life insurance, will be able to help you.

Give the friendly team a call on 0800 072 1147.
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