WHOLE OF LIFE INSURANCE
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What Is Whole Life Insurance?
In short it is a type of life insurance which guarantees to pay out a lump
sum of money when you die.
It’s one of several options that you have when you’re in the market for a life insurance policy.
The policies are designed to provide life insurance for your whole life, not just a specified term. How much the policy pays out depends on the individual policy, and payments are required until the policyholder’s death. Payments might be monthly or annual, and some whole life policies are even based on paying a one-off sum to secure cover. With-profit and unit-linked whole of life policies involve investing some of the money in an investment fund while the rest is used to pay for the sum assured.
A whole life insurance policy offers a range of benefits, and we can help you to find your perfect policy. Give us a call or why not try out our sister site for instant whole of life insurance quotes, where you can also apply online.
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How Does Whole Life Insurance Work?
Whole of life insurance policies will pay your next of kin a lump sum when you die, whenever that is, as long as you pay what you’re required to pay. This is in comparison to term life insurance, which only lasts for a predetermined period of time. Once term insurance has run out, you will need to get a new policy.
Whole of life insurance is available in different types, such as with-profit or unit-linked policies, where a proportion of the money you pay is invested in an investment fund, while the rest pays the life assurance. If you take out a with-profit policy, your policy will be reviewed regularly. This is to compare the value of the policy with the cost of the life assurance to see if the investment fund is earning enough to cover the cost of the assurance. If not, you might need to reduce the sum assured or increase your contributions. Because your policy has a cash value, you can use it to withdraw money, take out a loan or pay future premiums.
It’s possible to set up this policy in a trust. If you choose to do this, the payment from the policy will go to the trustees who will distribute it to the beneficiaries of the trust.
Types of Whole Life Insurance
The different types of whole life insurance that are available can offer
different benefits, as well as drawbacks.
Non-profit whole life policies
A non-profit whole life insurance policy doesn’t have an investment element to it. The premiums are fixed and the policy holder receives a lump sum on death.
With-profit funds
A with-profit policy has an investment element to it. This means that the amount paid out on death is the combined amount of the sum assured of the policy and any money made from the investment. When you invest with a with-profit policy, the plan helps to balance out the volatility of the stock market. The plan keeps the investment returns from good years and payments can be topped up in bad years.
Unit-linked funds
A unit-linked whole life policy has an investment element with monthly premiums used to buy units in a selected fund. As the number of units held grows, the value of the policy increases too. With this type of policy, your premiums increase if the investment growth is poor.
What is the difference between Term and Whole Life Insurance?
- Coverage period: Term life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. Once the term is up, the policy expires and no benefits are paid out unless the policyholder passes away during the term. Whole of life insurance, on the other hand, provides coverage for the entire life of the policyholder.
- Premiums: Term life insurance premiums are typically lower than whole of life insurance premiums, especially for policies with shorter terms. Whole of life insurance premiums are typically higher, but they provide lifetime coverage and can accumulate cash value over time.
- Cash value: Term life insurance policies do not accumulate cash value. Whole of life insurance policies, on the other hand, accumulate cash value over time, which can be used for a variety of purposes, such as paying premiums, taking out a loan, or withdrawing cash.
- Investment component: Whole of life insurance policies typically have an investment component that allows the policyholder to invest in stocks, bonds, or other securities. Term life insurance policies do not have an investment component.
- Flexibility: Term life insurance policies are generally more flexible than whole of life insurance policies. For example, the policyholder can often choose the coverage amount, the length of the term, and the beneficiaries. Whole of life insurance policies have more restrictions on changes to the policy terms.
Is Whole of life insurance worth it?
For younger people and young families, term life insurance may be the best option. This is because it is less expensive and easy to set up and manage. You can set it up like your car insurance or home insurance. When you’re younger, you have a lower risk of passing away but might also have a family to care for. This is when term insurance can make sense, covering you as a “just in case”, because you never know what could happen. When the term insurance policy runs out, you can take out a new policy if you want to ensure you still have protection. With the low cost payments, you can have more money left for other investments, savings or important day-to-day expenses.
However, whole life insurance policies can be better for some people, particularly those over 30. If you can afford to spend a bit more on your life insurance premiums, you might choose to have whole life insurance instead. One excellent reason to do so is that it will help to cut your family’s tax bill and, in particular, help with inheritance tax. You can write a whole life policy under a trust, which means a tax-free lump sum payout when you die. This can then be used to pay inheritance tax, which is charged at 40% of everything in an estate over the tax-free allowance of £325,000.
It is a good choice if you’re thinking about estate planning. It also helps to replace income when the policyholder dies, and it can be used to help pay for the care of a child or a parent when someone dies. Although the premiums are more expensive, they can stay the same throughout the policy as you get older.
Benefits of Whole Life Insurance
- Lifetime coverage: Whole of life insurance policies provide coverage for the entire life of the policyholder, as long as the premiums are paid. This provides peace of mind that the policyholder’s beneficiaries will receive a payout no matter when the policyholder passes away.
- Guaranteed payout: Whole of life insurance policies typically offer a guaranteed payout to the policyholder’s beneficiaries. This can help provide financial security and stability for the policyholder’s loved ones.
- Cash value accumulation: Whole of life insurance policies accumulate cash value over time, which can be used for a variety of purposes, such as paying premiums, taking out a loan, or withdrawing cash.
- Tax benefits: The death benefit paid out to the policyholder’s beneficiaries is generally tax-free, providing a tax-efficient way to pass on wealth to loved ones.
- Estate planning: Whole of life insurance can be used as part of an estate planning strategy to help ensure that assets are passed on to the policyholder’s beneficiaries in a tax-efficient manner.
- Final expenses: Whole of life insurance can be used to cover final expenses, such as funeral costs, so that the policyholder’s loved ones do not have to bear the burden of these expenses.
How Are Whole Life Insurance Rates Calculated?
- Age: The age of the policyholder is an important factor in determining the premium. The older the policyholder is, the higher the premium is likely to be.
- Health: The policyholder’s health is also an important factor in determining the premium. The insurer will typically ask the policyholder to provide medical information and may require a medical exam before issuing the policy. If the policyholder has any pre-existing medical conditions, the premium may be higher.
- Lifestyle habits: Some lifestyle habits, such as smoking or engaging in hazardous activities, can increase the risk of death and may result in higher premiums.
- Coverage amount: The amount of coverage the policyholder requires will also impact the premium. The higher the coverage amount, the higher the premium is likely to be.
- Length of coverage: The length of coverage is another factor that can impact the premium. The longer the coverage period, the higher the premium is likely to be.
- Cash value: Whole of life insurance policies accumulate cash value over time. The amount of cash value that is accumulated will impact the premium.
- Dividends: Some whole of life insurance policies pay dividends to policyholders. The number of dividends paid will impact the premium.
Overall, the premium for a whole of life insurance policy will depend on the specific policy and the individual factors of the policyholder. It is important to shop around and compare policies from different insurers to find the best policy and premium to meet your needs. You can work out how much cover you need using a whole of life insurance calculator.
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Further Reading
The Ultimate Guide For Life Insurance
Check out our in depth guide on Life Insurance. Protect your family with a lump sum of money when you die.
Life & Critical Illness Insurance
Protect yourself and your family against death or serious illness with a lump sum payout. Read more here.
Family Income Benefit Insurance
Protect your family with a monthly income in the event of death.
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