This article was last updated by the author in October 2016.
A brief introduction to whole of life insurance.
Whole of life is a long-term policy designed to pay out a cash
lump sum on death, whenever that occurs. Traditionally, such
policies built up a cash value over time, although in the early
years this could be very low. Most policies now have no surrender
value at any time. enabling the insurer to offer lower
Typically, regular premium policies are used to meet
policyholder liabilities on death, such as inheritance tax or
funeral costs. Single premium policies are available, although
these are primarily investment contracts providing very little life
Flexible whole of life
With a flexible whole of life policy, the policyholder chooses
between a minimum level of guaranteed insurance and a maximum level
to meet their needs. The initial cover selected at outset can be
changed within upper and lower limits at any time, subject to the
Premiums are allocated as units, and these are cancelled on a
monthly basis to pay for the insurance cover. Premium levels are
usually reviewed every ten years, though the intervals are often
shorter at older ages. If the value of the policy is not enough to
maintain the required sum assured, the policyholder can choose to
increase the premium and/or reduce the level of cover.
Alternatively, the policyholder can, in some instances, accept that
the policy may 'burn out', i.e. possibly expire without value
before death occurs. With some whole life policies, premiums may
cease at a preset age, e.g. 85, even though cover continues until
The policy grows in value as the number of units held in the
policy accumulates and (hopefully) the value of each unit also
increases. The underlying investment funds to which unit-linked
policies can be linked cover the usual range of equity, fixed
interest, property, cash and managed funds. The investment growth
will depend on how much is being deducted to pay for the life cover
and any other optional benefits selected. If the policy is cashed
in, the surrender value is the bid value of the units allocated at
the time of surrender. If the total unit value exceeds the sum
insured, the higher amount is payable on a death claim.
There are a number of variations of the flexible whole of life
Maximum cover plans - the premium level is
fixed for a set period, say five or ten years, at the end of which
the premium is revised to a new and higher level in line with the
policyholder's new age. A fund with some small surrender value may
build up during this term, but it is likely to be largely depleted
by the end. It is important that policyholders understand that
their premium is likely to increase at a policy review (or that the
sum insured may be reduced). In some cases, such premium increases
can be very large.
Standard cover - the premium level is set at
such a rate that it need not be increased over the policyholder's
lifetime, as long as the underlying fund meets a pre-determined
rate of investment return (e.g. 6% a year).
Guaranteed cover - this is where there is no
investment, although there may be a surrender value. There is a
guaranteed level of cover throughout life in return for a
guaranteed level of premiums. In the past, this was usually called
'whole life non-profit assurance'.
Historically, with profit and low cost with profit versions were
These policies are popular with older people. Although often
marketed as over 50s plans, the average age of buyers tends to be
around 65. They usually offer low sums assured and premiums
together with simplified underwriting. There is normally a
moratorium period, typically 12 or 24 months from commencement,
when claims are not met. In some cases, insurers may pay in this
period if the life assured died in an accident. Although such
policies may not offer great value, their simplicity and guaranteed
acceptance can appeal to people who want cover just to pay for
their funeral. Many have premiums limited to a particular age (e.g.
Single premium unit-linked whole of life
As mentioned earlier, single premium policies are also
available. These contracts - often called investment bonds - are
written as whole of life contracts so can continue for as long as
the investor wishes. When the policy is taken out, the premium
(less charges) is used to buy units in the selected fund(s) at the
offer price. The policy can then be cashed in at any time, the
surrender value being the total value of the units at the bid price
on the day of surrender.
These policies are used purely for investment purposes. If the
life assured dies, the death claim in most cases is 101% of the
value of the units. This reduces costs and makes it easier for
older lives to invest by avoiding underwriting.
Regular premium policies can be increasing or increasable and
may have other options such as critical illness cover or waiver of
premium available at outset. If an increase in the sum insured is
requested, this will be subject to new medical evidence unless the
policy has a guaranteed insurability provision. This option allows
an increase in the level of cover on the occurrence of certain
events such as marriage or entering a civil partnership or the
birth of a child. In these circumstances no further medical
evidence is needed. The premium will increase as a result of any
increased life cover.
Practice varies between life offices, but some whole of life
policies will not pay out in the event of death caused by suicide
or self-inflicted injures in the first year of the policy.
With the exception of funeral plans and single premium
investment bonds, most whole of life policies are subject to a
medical underwriting process. The policyholder will complete an
application form detailing their personal details, age, current
state of health, medical history, occupation, hazardous pursuits
and lifestyle. An underwriter may also request completion of a
medical questionnaire, a medical report from the applicant's GP or
a medical examination. Alternatively, a tele-underwriting interview
may take place.
The majority of life offices offer whole of life policies. What
differs is the extent to which they offer options and the
underwriting criteria they apply. Because a claim is certain,
premiums are more expensive than for term insurance. The more
options a policy has, the more expensive it will become. However,
some policyholders are prepared to pay higher premiums in return
for such flexibility.