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Whole Life Insurance – Everything you need to know

Whole life insurance is generally more expensive than term life but there’s a lot more to it than expensive premiums. Unlike term life insurance, whole life insurance is not just a benefit paid out upon death. It works as a sort of investment fund to help ensure you get the most out of your money.

When whole life insurance is a good bet

Whilst whole of life insurance can be complex, it provides a better option for estate planning. Especially when it comes to inheritance tax. It also covers you, no matter what. So, for people with dependants that will never be fully self-supporting, it can be a better approach for your needs.

Getting around the different policy types

When you think about getting life insurance, you would think that most plans would be the same. Unfortunately, the world of life insurance is a lot more complicated. Life insurance provides stability for your family in the event of your death or serious illness. It’s serious business. Which is why there are different types and plans so there’s one to suit each individual’s needs.

Term life is best used until the kids grow up or until retirement.

Term life insurance policies are set up, normally to provide a safety net in case the individual was to pass away or become seriously ill. It’s generally used to cover unpaid mortgages, debts, education for children whilst you don’t have substantial savings to be passed down.

The problem with term life insurance is that the guaranteed premiums end.

So, what happens when your term life insurance has ended just as it’s needed? It’s not uncommon for children to still be living at home later on in life. Would they be in a position to cover the mortgage if you were to pass away? The chances that your parents might need care, or you become unwell are higher the older that you become.

Converting term life insurance is expensive.

The truth with term life insurance is that the term never actually ends. Merely, it’s a policy that can continue running. What happens instead is that the guaranteed premiums end. Then, the price gets hiked to extravagance.

It’s here that you may start to think about converting your term life to a whole life policy instead. But this is likely to require a second medical exam and, as you’re older, more expensive policy premiums.f

When might whole life be the right choice?

Whole life insurance tends to be the better option if you’ve maxed out on retirement options when you want to establish a financial legacy. It can be a better approach for people who;

  • Want to create a high lump sum payout for your dependants
  • Have already invested heavily in retirement funds
  • You want to outweigh the potential health and age increases in premiums over time.
  • You want a guaranteed payout for your family, no matter what.

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How Whole Life Insurance Works

There are different ways that a whole of life policy works. Generally, a traditional whole life insurance policy is where you pay a regular premium, which is guaranteed, and the lump sum is paid out upon your death, no matter what.

When you’re young, your premiums are generally more than the cost of insuring your entire life.

If you’re relatively healthy, the cost of your premiums over your entire life may actually be more than the lump sum you’ve invested in. That doesn’t make much sense when you could simply place those premium payments into a savings account to accumulate interest and receive a higher amount.

That’s why there is also an investment component with whole life insurance policies.

The premium is partly put into your insurance plan and partly invested. These can be called unit-linked policies, participating whole life insurance policies or some other term. It basically means that your money is split. Some of the premiums are used to buy the life insurance and pay the lump sum. The rest is invested in an investment fund. This is normally the company’s bonds, equity funds or stocks.

There’s a risk element to it, and normally these types of policies have regular review dates. There are different options you can take, whether you increase the premiums and decrease them to add to the cash value or premiums stay the same and you hope that the investment will increase the funds.

In a nutshell
  • You buy a whole life insurance plan and pay monthly or annually.
  • With unit-linked whole life policies, your money is split. Some are used for the life insurance payout and the rest is invested in a fund.
  • Regular review dates compare the value of your policy with the cost of the life assurance.
  • If the investment fund isn’t performing well, premiums may increase, or the sum assured may decrease. The choice is yours.

You can also choose to surrender your life insurance policy

When you surrender a life insurance policy, you essentially cancel it. You won’t get a financial payout in the event of your death. However, if you have accumulated a cash value on the policy, you’ll get this money back. Providers normally charge quite substantially for surrendering the policy, so you might want to understand the charges before making this decision. Any loans already taken out are taken off the balance too.

How is the money invested?

Some providers give you a choice of where you would like to invest the money. Sometimes, the money is pooled together with other people’s and invested into the company’s profits fund. This is then managed by an investment manager who puts the profit fund into different types of investments such as shares, bonds, property etc. If these become profitable, you’ll get your share at the end of the year and it’s added to your policy.

Dividends are not guaranteed, but they aren’t taxable.

As with all investments, it is not guaranteed that extra profits will come into your bank account. However, they are generally not taxed. There will be good and bad years, but overall the profits are generally smoothed for an even sum coming into the policy as it’s a long-term investment.

As long as you pay your premiums, your family get a lump sum of money when you die.

Whole life insurance, despite the investment factor, is a guaranteed safety net for your family after your death. The minimum payment is always specified and then the investment adds on anything over this. It’s a permanent life insurance policy which comes with both its pros and cons. So, it’s important to weigh up which ones are best for you.

What’s great about it is that you’ll get the same amount of coverage over the years, no matter what your age or health is. This guaranteed payout can give you and your family a sense of long-term financial security.

How much does whole life insurance cost?

Term life insurance is generally cheaper, as whole life policies tend to come with fees from the investment services and commissions from the underwriter. They are higher value, and payout is guaranteed so it makes sense why they would be more expensive.

The cost largely depends on your age and health status.

There’s no real change to the cost, so if you’re younger and fit and healthy when you take out the cover, you know that this price is going to last.  With all life insurance policies health status, age, lifestyle and occupation can really add pounds to your premiums. That’s why they become more expensive the older you become and if you suffer from illnesses – you’re more of a risk.

Just because you want to pass money down to your family, it doesn’t mean that a whole life policy is best.

Term policies are less expensive, and if you can afford it you can put money into a mutual fund or savings account on your own accord. You can also reduce your term life insurance as you build up other assets. Despite this, if you’ve already invested heavily in more typical retirement funds and you want to establish a financial legally, whole life could be a better avenue for you to go down.

cost of whole life insurance

Tax advantages of whole life insurance

Whole life insurance is written in trust, so more beneficial if you’ll looking to counteract inheritance tax.

If it is likely that your assets will fall into the estate, your family will pay inheritance tax on what is designated to go to them. With whole life insurance, it is set up and written into a trust with your family as the beneficiaries. Therefore, they can use this money to offset the inheritance tax payments.

Inheritance tax is normally paid on assets over £325,000 at 40% tax rate. This includes the family home. So, part or all of the lump sum paid out can help to pay for this and help your family have a higher financial blanket to live on. Any dividends that are paid into the policy too normally do not require tax to be paid.

When it comes to tax and other financial matters, it is always best to get guidance from the tax office or a financial advisor to make sure you are fully covered and getting the right advice for your particular situation.

Things to consider when investing in whole life insurance

  • Make sure that your premiums and payout are guaranteed.

Some providers hike up prices after a certain period, so it’s important to make sure that your premiums are definitely guaranteed for the remainder of your policy. i.e. your life. Review dates over time measure the funds’ performance which can actually affect the level of future payouts. The value of the plan is compared with the value of benefits, which can cause an increase in premiums or, alternatively, reduce the payout. Check the details and get confirmation of what is and isn’t guaranteed.

  • Get to grips with the terms.

A lot of people aren’t aware that your premiums will be reviewed over time according to the financial ombudsman. Make sure you read the small print, terms and conditions and everything in between. If there’s something you don’t understand, make sure you ask and get any terms in writing to avoid complications later on.

  • The higher the risk the higher the premium.

Whole life tends to be a more expensive option, but it can really pay off over time. But can you really afford to pay this premium amount for the rest of your life? Outweigh the pros and cons – you’ll get a higher amount and can avoid hiked prices after an illness. In some cases, you can review the premiums and can reduce them if it’s written in your terms. For example, if you quit smoking, you can get cheaper premiums. But essentially, you will be paying these premiums for a long time. Consider life changes, retirement, when your kids grow up and if whole life is really what you need. There are some plans that you can agree on a date or age when you stop paying the premiums and still get the financial payout. Compare policies to find the best one to suit your needs.

  • Your investment isn’t free.

With the investment component, providers will charge for their services. They have to hire a professional investment manager who will manage your funds. It’s important to understand what these are and how it will impact your policy and payments over time before purchasing your life insurance policy.

  • Take out a waiver of premium.

If you fall ill, become unemployed or for any other reason can’t make your premium payments, it can cancel your policy and you’ll lose it all. There are generally terms that cover you if a payment is accidentally missed where you can pay it within a certain timeframe and maintain the policy. But if you are unable to financially pay your premiums, you’ll lose the policy. A waiver of premium is a clause which relinquishes the obligation of the individual to pay any further premiums if they become seriously ill or disabled. It normally requires an upfront charge but can be an extra protective layer to fall back on.

  • You can use the cash value to pay for care expenses.

In the event that you become terminally ill, with 12 months or less to live, then the cash value invested can sometimes be used to pay for care expenses if it is needed. You might want to check with your provider if this is an option

  • Cash value can be borrowed against, but if you die, it needs to be paid back.

The cash value is a great asset and the main reason people invest in whole life insurance policies. But if you’re in debt when you die, the debt is taken out of the financial sum that is paid out, meaning, less for your family. Interest is also due on the policy, so with outstanding debts, the benefit paid, and the cash value can be significantly reduced.

Whole life insurance is a risk like any other investment

That’s why it’s generally more expensive and comes with certain terms and conditions that need to be understood before taking out a policy. They invest in your life and invest your money on your behalf, so it is a riskier policy for everyone. If you’re simply looking to cover mortgages, help your children until they can rely on their own finances or to give you time to increase assets, term life is probably the better option for you instead. But if you want an extra fund to help offset inheritance tax on the estate, have lifelong guaranteed premiums and a payout, then whole life might just be a risk that is worth taking.

When you’re ready for whole life insurance:

  • You want to earn a higher, guaranteed payout for your dependants.
  • The policy depends on investment and you understand how this works.
  • You understand the terms and charges associated with whole life policies.
  • You check the terms and conditions and are happy to proceed knowing what is guaranteed and what isn’t.
  • You’ve considered all options and term life insurance.
  • You want to offset the inheritance tax on your estate so that your family are better off.
  • You’ve considered the cost of premiums and know that you can afford them.
  • You have a backup plan in place if your circumstances were to change.
  • You’ve had professional advice on investments and tax before purchasing.
  • You fully understand the risks.

Where to get whole life insurance

When it comes to whole life insurance policies, insurance companies widely vary when it comes to assessing risks, underwriting criteria and terms. The best way to search for the best solution for you is to speak to a financial adviser and compare policies and terms. Whole life insurance can be complex financial products so if you don’t understand what the policy is offering, it is best to get professional advice.

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