Sunday, October 12, 2014

Whole-of-life insurance

As the name suggests, a whole of life insurance policy provides cover for your entire lifetime. It guarantees a lump sum payment at whatever age the policyholder dies, provided premiums have been paid continuously from the start of the policy.
The proceeds of the policy will usually go to the policyholder’s family or beneficiaries of their estate. 
The premium you pay is split to purchase life cover and build up an investment reserve. The idea is that the investment growth in the early years subsidies the higher cost of life insurance as people age – thereby providing insurance for the whole of your life, as long as you pay the premiums. 
However, it is important to bear in mind that if the investments perform poorly, the premiums might have to increase so that you still maintain the same level of cover.
This kind of policy is often taken out to cover future inheritance tax bills. Inheritance tax is payable at 40% on the value of your estate over £325,000 (for the tax year 2014/15), which includes your property and all other assets. Premiums are high because a claim is inevitable.

Reviewable policies

Most whole-of-life policies guarantee that your premiums won’t change for the first 10 years. However, if you have opted for a “reviewable policy”, your cover can be renewed after the 10-year period finishes and premiums could rise substantially to ensure the policy will be able to pay out the expected lump sum.
When working out whether the premiums need to rise, the provider will look at the way in which the underlying investments have performed up to that date, as well as taking into consideration the customer’s circumstances, such as their health and life expectancy. 
If a policyholder is unable or unwilling to increase the amount they pay for cover, they can either cash in the policy, or accept the policy will provide a smaller sum than they had anticipated at the outset. Remember that if you are considering a whole-of-life policy, there is a risk that you will pay more into the policy than you will end up getting out of it. 
Only “non-reviewable” policies have fixed premiums which will not change over time, but these premiums are likely to be more expensive, at least initially, than the premiums you will pay for reviewable cover.
Whole of life insurance comes in various forms:

Non-profit whole-of-life policies

Non-profit whole-of-life policies are similar to term insurance policies, in that there is no investment element, and premiums are fixed. Policyholders receive a cash lump sum on death, which is also fixed.

With-profit whole-of-life policies

A with-profit whole-of-life policy includes an investment element, so that the pay-out on death is the sum assured, plus any investment profits allocated to the policy. 
With-profits plans aim to smooth out the peaks and troughs of stock market volatility by retaining investment returns built up in good years so that payments can be topped up in bad years. Bonuses are intended to be added yearly to the basic sum assured - with a possible final bonus being paid at the end of the term.
However, in many cases they have performed poorly, and as a result this kind of policy is much less popular than it used to be.

Low cost whole-of-life policies

This is essentially a with-profits plan, which on death will pay out either the guaranteed death benefit, or the value of the policy, whichever is highest.

Unit-linked whole-of-life policies

This kind of life insurance incorporates an investment element where the monthly premiums go towards purchasing units in a selected fund. The policy grows in value as the number of units held increases. 
However, if investment growth is poor, premiums will increase.

Over-50 plans

Over 50s plans typically promise a relatively small pay-out, and are generally designed to cover funeral costs. Premiums are usually guaranteed for life, and pay-outs are usually small (between £500 and £2,000).
However, those buying these policies can find they end up paying far more than the policy will ever pay out when they die, especially if they live a relatively long time.

Endowment policies

An endowment policy is effectively an investment scheme with life insurance attached. This type of plan used to be popular with interest-only mortgage holders who used them to build up savings with which they could repay their mortgage capital. 
However, many of these schemes have under-performed, so they are much less popular than they used to be. 
Policies can be either with-profits, where bonuses are added to the policy, and once added are guaranteed, or unit-linked, where premiums are invested in investment funds whose value can move up and down, with no guarantees attached.

Choose the right policy for you

When buying life cover, always compare a wide range of different quotes to ensure you find the best possible deal to suit your needs. 
Remember, however, that you shouldn’t base your decision to buy cover on price alone. It’s also important to check the level of cover and to understand whether or not your premiums could rise in future. 


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