Whole of Life Insurance

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Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

 

What is Whole of Life Insurance?

 

Whole of life insurance provides your loved ones with a lump sum when you die so long as you’ve continued to pay your premiums.

 

It is often used to cover an inheritance tax liability, funeral costs or to pay off outstanding loans.

 

The cover offers policyholders the comfort of knowing their loved ones will get a guaranteed cash lump sum payout after their death.

 

Opt for cover with guaranteed premiums so you can lock in the cost of the policy from the outset.

 

99.9% of all whole of life insurance claims were paid out in 2015. Association of British Insurers

What is it?
 

Do I need whole of life cover?

Term Insurance is usually more suitable for covering large debts with a set term, such as a mortgage,

Whole of life insurance is used for other purposes where a payout on death is required regardless of when it happens, such as:

  • Covering funeral costs – an inevitable cost which most would rather cover than leave to their love ones to find during such a difficult time.
  • Estate and inheritance tax planning – with the price of UK property many families now have sizeable potential IHT liabilities which are best covered to avoid a heft bill.
  • Leaving small gifts to loved ones after your death.
Do I need it?
 

Difference between Term Insurance and Whole of Life Insurance?

  • Term insurance ends after a set term, e.g. 25 years. Whole of Life Insurance covers you until you die (providing you keep paying the premiums and stick to the policy terms).
  • As payouts are guaranteed with Whole of Life Assurance, it tends to be more expensive than Term Insurance.
  • You have a number of options for term insurance payouts, such as decreasing coverlevel term insurance or family income benefit.
  • For Whole of Life cover, the payout is fixed.
  • Both types of life insurance have the option of guaranteed premiums to ensure the cost of your plan is fixed for its duration.
Term vs whole of life
 

How are Whole of Life Insurance policies taxed?

Without proper estate planning, the payout from a Life Insurance policy will become part of your estate when you die.

HMRC usually charges inheritance tax at 40% on the proportion of an estate that rises above a set threshold. This will include your Life Insurance payout.

Putting your Whole of life cover into trust

To avoid an inheritance tax charge on your Life Insurance payout, you can arrange to have your Whole of Life Assurance policy paid into a trust for your loved ones, so it never becomes part of your estate and subject to taxation.

Paying a Whole of Life Assurance policy into a trust can also leave your family with ready cash to pay any inheritance tax liability your estate might attract after your death.

How is it taxed?
 

How much does whole of life insurance cost?

  • Whole of Life Assurance tends to be more expensive than Term Insurance, because the payout is guaranteed.
  • As with other types of insurance, Whole of Life cover costs more to buy the older you are when you take out the policy. That’s because you present a greater risk to insurers as you age.
  • For over-50s cover, a subset of Whole of Life Insurance, many companies offer guaranteed acceptance under a certain age, such as 80, without the need for a medical.
  • The cost of Whole of Life Cover, especially guaranteed over-50s plans, doesn’t tend to be linked to the policyholder’s health as Term Insurance tends to be.
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Common questions about whole of life insurance

What is Whole of Life Insurance?

Whole of Life Insurance is a form of Life Insurance that pays out after your death, whenever that might be providing you continue paying the premiums and don’t otherwise breach the terms of the policy,

This is compared to Term Insurance, which is life insurance that ends after a set term agreed between the insurer and the insured. Term Insurance, particularly Decreasing Term Insurance, is therefore often used to cover a debt with a fixed term, such as a repayment mortgage.

 

Whole of Life Insurance or Term Insurance?

Couple leaving a lump sum for their loved ones with whole of life insurance

When comparing Term Insurance and Whole of Life Insurance, as payouts on Whole of Life Assurance policies are guaranteed, premiums are usually far more expensive than Term Insurance..

This is because for a Whole of Life Assurance policy the risk insured is guaranteed to happen (i.e. the policyholder’s eventual death).

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 2015, the ABI revealed the average Whole of Life policy paid out £5,925, compared to £53,790 for Term Life Insurance policies.

Do I need Whole of Life Insurance?

Do I need Whole of Life Assurance?

Whether or not you need Whole of Life Assurance depends on your personal circumstances.

If you want a guaranteed lump sum to leave your loved ones after your death, then Whole of Life cover might be right for you.

Where term insurance is significantly cheaper than whole of life cover it is important to recognise the liabilities they are designed to protect.

If you have a liability which is being paid off over time or has a finite shelf life such as a mortgage, car loan or children’s school fees then term assurance is likely to be a more cost effective way of protecting that liability.

If there is a liability which will arise on death regardless of the time frame such as funeral costs or an inheritance tax liability, a whole of life insurance policy is often a more suitable option.

 

Whole of Life Insurance for small debts and funeral costs

It’s worth considering, though, 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.)Retired couple planning to use Whole of Life Assurance to pay for their funerals

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.

As Whole of Life Insurance tends to leave small lump sums, many people use the cash to cover the costs of their funeral, so their loved ones don’t have to find the money to give them a proper goodbye.

 

Inheritance tax and estate planning with Whole of Life Assurance

Another way Whole of Life cover can reduce the burden on loved ones is by playing a part in inheritance tax and estate planning. With the cost of property spiralling in UK there are growing numbers of Britons finding out they now have IHT liabilities to consider with whole of life insurance being one of the simplest ways to cover this potential liability.

Is there an age limit on Whole of Life cover?

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.

Get Life Insurance Advice from our experts

When considering getting Whole of Life cover, one of our advisers will know which insurers will insure a person in your age range.

Drewberry can also talk you through any estate and inheritance tax planning decisions you may be thinking of making using Whole of Life Insurance. So to find the best Whole of Life policy for your needs, whatever your age, consider getting financial advice.

Peter Banks
Tax and Investment Adviser at Drewberry

How is Whole of Life Insurance taxed?

Cash from a Life Insurance policy is added to the value of your estate when you die, just like any other assets. Your estate is the total value of all of your assets at your date of death.

Estates are usually required to pay inheritance tax at 40% on all assets above a set threshold. As such, you might find the payout from a Whole of Life is taxable if you haven’t engaged in proper inheritance tax and estate planning.

An inheritance tax calculator can help you determine the size of your estate’s tax liability.

 

Do I need to write my Whole of Life Insurance policy into trust?

If you don’t want the payout from your Whole of Life insurance to be taxable after your death, the easiest way is to write the policy into a trust with your beneficiaries as the trustees, or controllers.

That means the insurance company pays the cash straight to the trust when you die, bypassing your estate. As your estate never receives the money, the payout from your Life Insurance becomes tax-free. What’s more, your beneficiaries get ready cash on hand through the trust.

Can I use Whole of Life Insurance to pay inheritance tax?

It is possible to arrange a Whole of Life policy to help with inheritance tax costs?

Here, writing your policy into trust becomes essential if you plan to use Life Insurance to cover an inheritance tax liability. This is because doing so stops the payout becoming part of your estate, which generally be accessed until the inheritance tax bill is paid, even if it’s necessary to access the estate to pay the bill.

Having a whole of life policy in place could mean your beneficiaries don't have to sell the family home to pay inheritance tax

Where the estate has sufficient liquid funds to cover the inheritance tax, HMRC will usually grant the estate’s executors 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, even after a life insurance payout, 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.

 

Paying inheritance tax with Whole of Life Insurance written into trust

One way to avoid placing your loved ones under such financial stress after your death might be to use Whole of Life Insurance written into trust to pay your inheritance tax bill.

Not only will the payout from your Life Insurance 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. The 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.

 

Can Whole of Life Insurance pay the inheritance tax on gifts inter vivos?

Gifts you give away while you’re alive are known as gifts inter vivos, but if you die within seven years of giving those gifts, HMRC will usually try and claim inheritance tax on them.

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.

Do I need a medical for Whole of Life Insurance?

No, there’s usually no need to have a medical for Whole of Life Insurance policies. 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 they 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.

What are the pros and cons of Whole of Life Insurance?

Pros

Cons

You’re covered for your entire life, until you die.

Premiums are far more expensive than for Term Insurance.

Certain types of cover may be easier to get than Term Insurance for middle-aged policyholders in poorer health.

You could face an inheritance tax bill when you die if your policy is not written into trust and the payout becomes part of your estate.

Availability of cover for pensioners means Whole of Life policies can be used for estate planning.

Beware Reviewable 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:

  • Inflation
  • Investment performance
  • Reinsurer fees
  • 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.

Guaranteed Whole of Life Insurance premiums stay fixed over time, although will naturally rise if you want to increase the benefit or you’ve chosen to index-link the benefit so it maintains pace with inflation. However, the inflationary increase will be set out clearly, so you’ll know exactly by how much your premiums will rise across the life of the policy.

Drewberry has recently had Whole of Life Insurance clients whose yearly premiums have doubled or even tripled at the 10 year anniversary mark because they held a historic policy with reviewable premiums.

We don’t feel that this is fair as it can lead to people getting ‘stuck’ with insurers, especially if they’ve suffered bad health during their policy term, and they may have little option but to pay significantly more for ongoing cover.

Neil Adams
Pensions & Investments Expert at Drewberry

Given the significant hikes that can happen with the cost of Whole of Life Insurance with reviewable premiums, Drewberry never recommends such premiums. As a company, we feel guaranteed premiums are the best Whole of Life Insurance option.

Can I cash in my Whole of Life insurance policy?

No, you can’t cash in your Whole of Life Assurance policy. You can cancel your Whole of Life cover at any time, but if you do you’ll lose the premiums you’ve paid and won’t get anything back.

Do I need advice?

Drewberry's expert financial advisers can help you get Whole of Life cover

As independent Life Insurance brokers, we’re on hand to answer any questions and provide guidance to ensure you can make an informed decision when considering Life Insurance.

Also, 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.

We’d always recommend getting advice when buying cover, as it can help you get the best policy for you. We’re just on the other end of the phone, so please don’t hesitate to contact us on 0208 432 7333.

Rob Harvey
Independent Protection Expert at Drewberry

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