While term life insurance policies are more popular, there are still individuals that would prefer a guaranteed pay out as well as insurance that serves as a type of investment.
Even though this type of insurance cover can be more expensive, the guaranteed benefits make it well worth the benefit for those with a larger budget.
For someone that is more financially secure, this is often a better choice than term insurance.
How Does a Whole of Life Insurance Policy Work?
One of the first questions often asked by consumers is “How can insurance companies guarantee a payout on a whole of life policy?” One must realise that insurance companies are collecting premiums from tens of thousands of people in various age groups and health conditions all the time. The older and the poorer the health, the higher the premium. In essence, those that fall into higher risk factors are charged higher premiums.
Premiums are invested in funds with the insurance company. In most cases, you will actually be able to select how the money is invested. This enable the premium to grow over time and provide the insured a return on the premiums they “invest” over the term of the policy. This is why the companies are able to offer a return to the consumer interested in buying a whole of life policy.
When first securing a policy, the premium is based on age and health conditions. Unlike a term policy, the terms will often vary throughout the life of the policy as well as requiring a physical exam per the terms of the contract. When it comes time to renew the contract, the premiums can and will be adjusted accordingly to the clients age and health condition.
As the insured, it behooves you to avoid things that can significantly raise the cost of the policy, such as smoking or falling out of good health (meaning suddenly stopping exercising and gaining excessive weight). Doing so will keep the terms of the policy more reasonable over its lifespan.
Whole of Life Coverage Benefits
The most enticing benefit of whole of life cover is the guaranteed payout of the policy. Unlike a term life insurance policy, there is no expiration date on the policy. Furthermore, since these accounts are often interest bearing accounts, you never run the risk of paying more into the policy than is received to the beneficiaries upon the payout.
This type of policy can be combined with different types of coverage, such as critical care, but this should be discussed with one of our insurance experts prior to securing the policy. Some policies, if combined, will only offer a single payout, which will reduce the benefits paid out to the beneficiaries of the policy. While the overall premiums may be more expensive if the policies are purchased separately, the payout could be significantly higher.
As with any other type of insurance policy, a whole of life policy offers the insured peace of mind. Loved ones will have the income they need to continue on long after the insured has passed. The amount of income provided will depend in various factors, which are covered in our Drawbacks and Considerations sections below.
Whole of Life Coverage Drawbacks
As noted, whole of life is significantly more expensive than term life insurance, especially as the insured gets older. For those on a budget, this should be a major consideration. Even if the policy is affordable now, consider what costs will be 10 or 20 years down the road. Will the policy still be affordable during those times when the premiums are likely to rise?
Unlike a term policy, there is no end date in sight in regard to premiums. Up until the policy is cashed in, there will always be some type of minimum payment due to keep the policy active.
Whole of Life Insurance Cover Considerations
The first consideration when securing any type of insurance is always how much money will be needed in the future for loved ones. There are numerous things to consider when coming up with the final value of the policy.
Some of these considerations are:
• Mortgage payments
• Secondary care
• Living expenses
• Educations costs
• Inheritance tax
Most of these considerations are self-explanatory, but we would like to briefly further explain two of them: inheritance tax and inflation. If the policy is not “In Trust,” it will more than likely be subject to an inheritance tax. If this is not accounted for, the beneficiaries will receive far less than anticipated, possibly putting them into financial difficulties.
Inflation is another matter altogether. The value of the pound today is likely to diminish by the time the policy has been cashed in. In other words, if £500,000 covers the costs today, it may take £1,000,000 to cover costs 20 years from now. If the cost of inflation over the lifespan of the policy is not factored properly, the policy will fall far short of its intentions.
Financial Considerations for Whole of Life Cover
Earlier we stated that whole of life cover is also considered an investment. Because of this, research will be needed to see the overall performance of the insurance fund. Ideally, the fund will have strong past, leading one to believe it will perform strongly in the future, offering a significant return on the premium.
It will also be important to compare life insurance quotes from various companies. Some policies may not have as strong a performance over time, but they may also cost much less. All of these factors come into play. Luckily, we feature a comparison tool as well as the ability to call into one of our insurance experts for comparison and policy information. Be sure to research all terms and conditions of the policy before securing the contract.
Do You Really Want Whole of Life Cover?
Purchasing life insurance is one of the most important financial decisions a person will make. This is the future of the family at stake, so it is not a decision that should be taken lightly. Versus a term policy, whole of life guarantees a payout to the beneficiaries. Yes, it costs a bit more, but for many, the peace of mind in knowing the family will be taken care of regardless of when they pass is well worth it.