Provided that the premiums are maintained, a whole of life insurance policy is guaranteed to pay out a cash lump sum upon death. Unlike level term insurance, which only pays out during the defined policy term, the policy is guaranteed to provide coverage regardless of the age of death.
The Cost of Whole Life Policy Coverage
The uncertainty faced by the insurer and complete assurance provided to the insured means that whole of life insurance is more expensive than level term insurance. However, premiums are guaranteed to stay the same for at least the first 10 years of coverage. They will normally stay the same for the duration of the policy, but this depends upon whether there is a change to the mortality rate.
Mortality Deductions from Whole of Life Insurance
The provider takes a mortality deduction from each premium. This deduction is used to cover the ongoing cost of covering the likelihood of death. The risk of the insured passing away changes each year and will be statistically assessed by a qualified actuary. This means that the percentage of each premium that goes towards covering the mortality element can change.
The Investment Element of a Whole Life Policy
In order to negotiate the indeterminate nature of when a whole life policy pays out, an investment element is built in to cope with any fluctuations. The life company invests some of the proceeds into equities, bonds, trusts and fixed-interest investments. This profit that this generates will form a pool of money that can be utilised by the insurer, or withdrawn by the insured, in the future.
Is a Whole of Life Insurance Policy an Investment?
Unlike level term insurance, a whole life policy does offer a cash-in value. The longer the policy has been in operation the greater the likelihood it will generate a reasonable return. However, it should not be taken out as an investment. The returns aren't controlled by the individual and are unlikely to be as good as the historic returns from investing in a stocks and shares ISA.
Using a Guaranteed Whole Life Policy for Tax Avoidance
Whilst paying the proceeds of a policy to the estate is normally free of income tax, it could still potentially attract inheritance tax. This depends upon the individual's finances at the time of death. It is possible to use whole life insurance to ensure that money is paid outside of the insured's personal estate. After seeking advice from a financial adviser, clients often take out a whole life policy for this objective alone. This may not be effective with level term insurance as the majority of people will outlive their coverage.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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