“At its best, life is completely unpredictable” - Christopher Walken

Whilst we cannot prevent death, we can ensure that our family is financially protected for when the time comes by taking out life insurance. Whole life insurance (also known as ‘life assurance’) is one of the more popular types of life insurance cover - but who exactly needs it?

In this article, we’ll look at how a whole life insurance policy works and the types of cover available.

What is whole life insurance?

Whole life insurance is a type of insurance policy that provides cover for the remainder of your life (so long as you keep up with your premium payments). Upon your death, a cash lump sum payment is paid to your loved ones, reducing financial burdens during this difficult time. 

How does it work?

Just like anytype of life cover, the policy pays out a lump sum when the policy holder dies. The key benefit of whole life policies is that you are covered no matter when you die. Whole life insurance cover can be taken out in three forms:

  • Non-profit whole life cover - This is often referred to as balanced cover as your premiums remain the same throughout the policy. Your policy pay-out amount is also fixed in agreement with your insurance provider.
     

  • With-profits whole life cover - Your premium payments are paid into an investment fund by your insurance provider. The aim is to make a return that will cover the eventual policy pay-out. One benefit is that if the investment is successful bonuses may be added to your policy. The downside is that if it underperforms, you may be charged more for premiums to cover the loss.
     

  • Unit-linked whole life cover - This works similar to with-profits except you choose which investment fund your policy is linked to. Just like with-profits, if your investment underperforms, your future premiums may increase.

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How much does whole life insurance cost?


Generally, whole life coverage is one of the more expensive life insurance options out there. Additional rises in cost are mainly impacted by your age and health among other factors. 

When applying for life insurance cover, your insurance provider will usually ask you to fill out a questionnaire regarding your health and lifestyle. Your provider will want to know information such as your:

  • Age
     

  • Health
     

  • Family medical history
     

  • Occupation
     

  • Smoker Status

Whilst smoking is bad for your health, it also increases the cost of life insurance - however, some providers will reduce your premiums if you quit smoking. If you wish to save money on whole life insurance, it’s best to take out cover early as the older you become the more you will need to pay.

If you’re looking for ways to cut life insurance costs why not check out our article on 4 Ways to Get a Cheap Life Insurance Policy.

Can I cash in my whole life insurance policy early?

Though it is not a guarantee for all providers, it is possible to cash out your policy if you no longer require coverage. Should you decide to end your policy at any point, a surrender penalty fee will be charged to your policy's value. 

Before taking out a policy, be sure to read the insurance agreement, so you know whether you can or cannot cash out your policy.

Products & Services from the leading financial brands

  • Zurich
  • Legal And General
  • Aviva
  • AIG
  • Beagle Street
  • Canada Life
  • Cavendish Life Cover
  • LVE
  • Royal London
  • Vitality Life
  • Virgin Money
  • Budget Insurance

Alternatives to whole life policies

If you find that you don’t need whole life cover, or if it is out of your budget, there are a range of alternatives on offer.

  • Term life insurance - Unlike whole life policies, this covers you for a limited period of time known as the ‘policy term’. Premiums for term life insurance tend to be cheaper than for whole life. This makes it an affordable option for providing financial protection for your loved ones. With his type of policy, you can only claim on the policy if you die within the policy term. If you survive the policy term, you will no longer be covered or receive any compensation for the premiums already paid.

There are 3 types of term life cover:

Level term - Both the pay-out amount and premium rate remain fixed throughout the policy.

Decreasing term - Designed to cover large payments like a mortgage. Because of this, the pay-out value decreases as you make repayments overtime.

Increasing term - Ensures the eventual pay-out maintains its value. To do this, the pay-out value increases overtime. However, your premiums may also rise.

  • Joint life insurance - If you have a partner or spouse, a joint policy may be a better option. A lot of couples prefer a joint policy as it can often work out cheaper and easier to manage than two single policies. Joint life cover usually works on a ‘first death’ basis, in which the policy pays out and ends after the first death in the couple.
     

  • Family income benefit - Upon your death, your family begins to receive monthly tax-free payments to cover the loss of income. Like term life insurance, it lasts for a set amount of time.
     

  • Death in service benefit -  This is a benefit provided through your employers, whereby if you pass away whilst employed by the company, your family will receive a payout (which is typically based on a multiple of your salary).

Is life insurance tax-free?

As a general rule, the pay out from a life insurance policy is considered tax-free. However, there is one key instance in which your policy could be subject to inheritance tax. When you die, everything you own is considered part of your estate - including a life insurance policy. The payout of your policy will only be taxed if the value of your estate is above the inheritance tax threshold.

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