Whole of life insurance
20 December 2016
13 October 2018
This article was last updated by the author in October 2016.
A brief introduction to whole of life insurance.
- Overview »
- Flexible whole of life policies »
- Optional extensions »
- Key exclusions »
- Ratings factors »
- Product providers »
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 premiums.
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 cover.
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 policy's conditions.
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 death.
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 policy:
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 also available.
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. 90).
Single premium unit-linked whole of life policies
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.