Should I Get Whole of Life Insurance?
Whether or not you need Whole of Life Assurance depends on your personal circumstances. Whole of life insurance.
If you want a guaranteed lump sum to leave your loved ones after your death, or meet other obligations, then Whole of Life cover might be right for you.
Whole of Life Insurance or Term Insurance?
When comparing Term Insurance and Whole of Life Insurance, you’ll find that Whole of Life Assurance policies are generally more expensive than Term Insurance policies because the benefit is guaranteed.
Similarly, given the number of policies which are taken out to cover funeral costs the payouts on Whole of Life Insurance policies are usually lower than for Term Insurance.
In 2017, the ABI revealed the average Whole of Life policy paid out £4,511.16, compared to £78,323.35 for Term Life Insurance policies.
Each type of life cover is typically designed to protect very different liabilities.
If you have a liability which is being paid off over time or has a finite shelf life such as a mortgage, car loan etc., then Term Life Insurance is probably a better option.
If there is a liability which will arise on death regardless of the timeframe such as funeral costs or an inheritance tax bill, Whole Life Insurance is usually the more suitable option.
Funeral Insurance and Covering Small Debts
One of the most common uses for Whole of Life Cover is to provide Funeral Insurance. This ensures a small lump sum is paid out on your death to cover funeral expenses so your loved ones don’t have to worry about taking care of the cost or deducting it from their inheritance.
Over-50s Life Insurance plans are typically Whole of Life Cover used for funeral expenses, although some people may also use such policies to provide a minimal legacy to family or cover small debts.
It’s worth considering that your estate is usually required to cover any debts held solely in your name after you die, providing there’s enough money contained in it to do so. (Note that the rules are different for debts/mortgages in joint names.)
Assuming you’ve left a solvent estate, debts are usually paid first and your beneficiaries only get the value of your estate net of any debt payments.
So if you don’t have a mortgage but have smaller debts, such credit cards, which you don’t want deducted from your estate after you die, a Whole of Life policy may be suitable for you.
Inheritance Tax Insurance
When an individual dies, inheritance tax is due on the value of their estate above a set threshold. It takes a 40% bite out of anything you want to pass down the generations above this limit.
Many families are facing an inheritance tax bill thanks to rising house prices, so it’s becoming increasingly common to use Whole of Life Assurance to cover these bills.
Affordable life insurance rates
Where the estate has sufficient liquid funds to cover the inheritance tax bill, HMRC will usually grant the estate’s executor(s) access to settle the bill with a bank transfer from the deceased’s account(s).
However, these days most estates don’t have sufficient liquid funds available, commonly because a house makes up the bulk of the estate.
In such circumstances, executors and/or beneficiaries may have to pay out of their own pocket and attempt to recoup the money from the estate afterwards. Bank loans are also commonly available for beneficiaries in this situation.
Writing Whole of Life Insurance Cover into trust will ensure that not only will the payout be tax-free, but it can also provide your beneficiaries with a lump sum that’s outside your estate and therefore not tied up in probate.
This money can be used to pay the taxman so your estate can be released to the beneficiaries. That way, they can inherit what you always meant them to have.
Gifts Inter Vivos Insurance
Gifts you give away while you’re alive are known as gifts inter vivos, but if you die within 7 years – and potentially up to 14 years – of giving those gifts, inheritance tax is typically due on such gifts.
Whereas inheritance tax usually has to be paid out of the value of the estate, inheritance tax on gifts inter vivos must be paid by the recipient of your gift.
That means your gift could land someone with an inheritance tax bill several years after you’ve made it, when the money may already be gone.
The amount they would have to pay tapers down depending on how long you live after making the gift, so a set of decreasing term Life Insurance policies – known as Gifts Inter Vivos Insurance – could cover the potential inheritance tax liability on gifts you’ve made.
How Much Does Whole of Life Insurance Cost?
The cost of Whole of Life Insurance is typically more expensive than Term Insurance because there’s no term limit.
The risk to the insurer is assured, because as long as you keep paying the premiums and don’t otherwise violate the terms of the policy, there’ll be a definite payout at the end of the policy (i.e. when you pass away).
As such, premiums are generally costlier which leads people to often insure lower amounts with Whole of Life Cover, often just to protect against funeral costs and to cover small debts.
However, where the policy is being used to cover an inheritance tax liability, the sum assured could be worth tens or even hundreds of thousands of pounds. It is usually this sum assured that will impact on the cost of Whole of Life Cover the most.
Beware Reviewable Permanent Life Insurance Premiums!
In the past, many Whole of Life Insurance policies were sold with reviewable premiums. This means the insurer is entitled to increase premiums to cover their increased costs over the life of your policy.
Factors the insurer may use to increase reviewable premiums include:
The level of future claims the insurer expects to pay
The insurer’s own expenses and taxes
The insurer’s need to hold a capital buffer/financial reserves.
These can all result in significantly increased premiums over the life of the policy at each policy anniversary date through no fault of your own.
Will I Need a Medical for Whole of Life Insurance?
This depends on a number of factors, although a medical is more likely to be a requirement the more you’re looking to insure. If you do require a medical, poor health may increase the cost of insurance.
However, broadly speaking there’s often no medical for Whole of Life Insurance, especially when you’re looking to insure relatively small amounts.
Many providers, particularly those offering guaranteed over-50s plans, won’t even require you to take a telephone health questionnaire to get Whole of Life Cover.
Essentially, that’s because providers realise that they are insuring against an event that will definitely happen in the future, regardless of how healthy or unhealthy you are. As such, premiums tend to be higher across the board to take account of the more lenient medical requirements to obtain cover.
Age Limit on Whole Life Insurance
The maximum age for Whole of Life Insurance varies depending on insurer. The age limits on Whole of Life cover are generally higher than for Term Insurance, with it being possible to find cover in your 70s and even 80s.
This is why the policies are so attractive for older individuals looking to use Life Assurance as part of their estate planning.
Can I Cash in Whole of Life Assurance?
No, you can’t cash in your Whole of Life Assurance policy. Your Life Insurance cash in value at any time will be zero. You’re free to cancel your policy if you see fit, but if you do you’ll lose the premiums you’ve paid and won’t get anything back.
Whole of Life Insurance Calculator
Use our Whole of Life Insurance Quote tool below to calculate Whole Life Cover premiums for your specific needs and circumstances.
Mortgage protection life insurance
As mentioned, this will largely depend on the sum you’re looking to insure, so you must first work out how much Whole of Life Insurance you need to buy.
If you’re using it to cover funeral costs or small non-mortgage debts, this should be fairly easy. Simply get a quote from a funeral director for your funeral expenses or calculate the amount of debt you have and set your Whole of Life Insurance policy to match this.
Inheritance Tax Insurance Calculator
Calculating Permanent Life Insurance to cover an inheritance tax liability is tricker, because you have to try and estimate how much your estate will be worth when you die and therefore how much inheritance tax might be due.
A good first step is to use Drewberry’s free Inheritance Tax Calculator to add up all of your assets and calculate your potential inheritance tax liability. Once you’ve worked that out, you’re in a better position to understand the sum you may want to insure to protect your loved ones on your death.
Gifts Inter Vivos Insurance Calculator
Strictly speaking, a Gifts Inter Vivos Insurance policy isn’t Whole of Life Insurance. Rather it’s a set of term policies to cover the decreasing inheritance tax liability the majority of gifts you make while you’re alive to individuals face over a 7 year period.
When you make a gift to an individual, assuming you’ve made no other lifetime gifts or transfers previously, the gift only falls outside your estate if you live for 7 years after making it. During that 7 year period, inheritance tax may be due on a sliding scale on the gift should you pass away during this time.
The below table provides the rate of inheritance tax due on potentially exempt transfers (PETs) you make during your lifetime over a 7 year period.
This covers most gifts to individuals and gifts into certain trusts (although the majority of gifts into trusts will be chargeable lifetime transfers [CLTs] and therefore have different rules).
Expert Whole of Life Insurance Advice
As independent Life Insurance advisers, we’re on hand to answer any questions and provide guidance to ensure you can make an informed decision when considering Life Insurance.
If you’re looking for Whole of Life cover as part of estate and inheritance tax planning, the expertise of our advisers could be invaluable in helping you and your beneficiaries mitigate any potential liability.