What does whole life insurance cover?

If you’re considering buying whole life insurance, you may be wondering what it covers exactly and the types of cover available. Sadly we’re all going to die eventually, that’s why it’s even more important to make sure our loved ones are provided for when the time comes.

What is whole life insurance?

As the name suggests whole life insurance covers you for the whole of your life. When you die the policy pays out a lump sum to your loved ones to support them during this difficult time.

Just like any type of life insurance, when you take out cover, you start making monthly payments to your insurer. If you fail to pay your premiums your cover can lapse , and it is highly unlikely you will  receive any compensation for previous payments made.

One of the main benefits of Whole of Life cover is that the policy pays out no matter when you die. This is on the agreement that you continue to pay your premiums.

This type of life cover is often referred to by insurers as life assurance - as you are assured of a pay-out when you die.

Why should I buy whole life insurance?

If you’re looking for a long-term solution, whole life insurance should be your first port of call. In reality, we could die at any moment without any say, but that shouldn’t prevent us from protecting our loved ones.

While whole of life cover can be expensive, the peace of mind it provides for you and your family is invaluable. Nobody wants to consider the thought of leaving our loved ones financially vulnerable. That’s why it’s crucial to ensure you have a form of financial protection in place.

What is covered?

Just like a standard life insurance policy, it covers you in the event of death. The causes of death covered depend on the terms and conditions set out by your provider. 

You can also take out  joint life insurance cover, which covers both you and your partner under one policy. This is especially useful if you and your partner share financial responsibility for your household.

Many couples find joint policies easier to manage and potentially cheaper than individual policies.

Joint policies work on either a first death or second death basis. With first death, the policy pays out after the first death in the couple and then ends. Second death pays out once both policyholders have died.

In some cases it is possible to cash in a whole life policy early to receive part of the payout before you’ve died - this depends on your insurance provider and policy type.

It’s important to read the small print of your policy agreement to understand the terms and conditions of your cover.

Is whole life insurance tax-free?

Technically speaking, the pay-out from a whole life insurance policy is tax-free, however, it could face an inheritance tax bill.

When you pass away, your policy is deemed as part of your estate. Generally speaking, your estate won’t be taxed so long as it is valued below the inheritance tax threshold. If it rises above the threshold, the government will place a 40% inheritance tax on your estate[1]. 

If you have any concerns about the value of your estate, it’s best to consider writing your policy into a trust. This means that when you die, the policy belongs to the trust and not your estate, which means the proceeds of the policy may not be subject to inheritance tax. 

To learn more about Trusts and how they work check out our article - Write your policy in Trust.

How much does whole life insurance cost?

Generally speaking, whole life insurance is considerably more expensive than a standard term life policy. The main difference between the two is that whole life insurance provides permanent cover.

Term life insurance, on the other hand, has a policy term and a set expiry date (i.e 20 years). As such your family only receives a pay-out if you die within your policy term.

As you get older the cost of life cover rises significantly due to the increased chance of developing medical conditions and death. If you’re looking to save money on life insurance, it’s best to get covered at an early stage when premiums are at their lowest.

Whilst bad for your health, smoking also increases the costs of your monthly premiums. Some insurers may reduce these costs if you quit and remain smoke-free indefinitely.

[1] 2021/2022 Tax Year. Source: https://www.gov.uk/inheritance-tax