Whole-of-life insurance guarantees a payout when you die, no matter when that is. How does it compare to term assurance?
Life insurance comes in a number of different forms. Perhaps the most common is term assurance, where your life is covered for a specified term, say 30 years.
But what if you want your insurance in place for the rest of your life, no matter what age you die? In that case, you may want to consider whole-of-life cover. Let’s take a look at how these plans work, the pros and cons, and what it may cost you.
How whole-of-life cover works
Whole-of-life insurance plans guarantee to pay out to your family when you die, no matter when that is. Like a term assurance plan, the actual amount that your loved ones will get is guaranteed. That didn't use to be the case, but following legislative changes premiums are no longer invested, so are not subject to the fluctuations of investment markets.
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The different types of whole-of-life cover
There are a few different types of whole-of-life insurance plans.
You can opt for a straightforward policy where your premiums and the amount that will be paid out on death are guaranteed.
Or you can opt for what's called indexation or a yearly increase, where your premiums increase to take account of increases in the cost of living. These are sometimes measured using an official measure of inflation such as the Retail Prices Index.
Some policies also offer a waiver where you are allowed to stop paying premiums for a certain period if you're unable to work through illness or an accident.
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Pros and cons of whole-of-life cover
The obvious big selling point of whole-of-life cover is that your loved ones are guaranteed to get a payout when you die, no matter when that is. The trouble with term assurance is that for many of us the term comes to an end just as we become more likely to actually need to make a claim!
By writing the policy in trust, you can also help cut your loved one’s Inheritance Tax bill when you pass away. For more on this read Save your family thousands in taxes.
However, there are some significant downsides too.
The policies cost a lot more than term assurance policies, for a start. For example, for a 30-year-old non-smoking male to get whole-of-life cover worth £200,000 from PruProtect would cost £71 a month. For that same level of cover over 30 years with PruProtect, the premium drops to just £12 a month.
With term assurance, you pay premiums for the term that you are covered and then no more after that date. That’s not always the case with whole-of-life cover – do you want to be committing part of your pension every month towards your cover?
Thankfully some policies have limited payment terms, so you do not need to keep paying premiums beyond a certain age.
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