As with many insurance products, there are lots of terms that risk sounding like jargon. So at Cavendish Online, we’ve put together a brief guide to explain what whole-of-life insurance is, to help you make a more informed decision on whether it’s right for you.
In essence, the two types of life insurance policies you’re most likely to come across are ‘term insurance’ (the more basic form of life insurance) and ‘whole-of-life’.
Yes. Whole-of-life policies are offered generally in two main types - ‘balanced cover’ (often known as ‘standard cover’) and ‘maximum cover’.
With balanced cover, your premiums will stay the same throughout the policy. Even as you get older and may experience health issues, you’ll still continue to pay the same amount for your cover. As a result, your premiums won’t change.
You will also have a fixed cash sum agreed upon which the insurer will pay out when you die.
With a maximum cover policy, your cover is linked to an investment fund. The insurer invests the money you pay each month, with the hope that the returns made from the investments will cover the cost of the eventual payout.
Your premiums will then be reviewed periodically. If the investments aren’t considered to be performing to the level expected by the insurer, your cover may be changed. The insurer may increase your monthly premiums, or reduce the size of the payout received by your loved ones after you die.
While these policies are usually cheaper to begin with, increases in your premium are likely and may be significant.
It entirely depends on your circumstances and what you think is best for you, so it may be worth seeking advice.
One of the main benefits of whole-of-life insurance is that it can help your family deal with any bills associated with inheritance tax. Currently, if an estate is valued at more than £325,000, inheritance tax will be charged at 40% on the value of the estate above that threshold (click here for the latest government information on inheritance tax).
However, the tax will need to be paid before your loved ones are given access to your estate. This can put your family in a difficult position - they need to pay a tax bill which may run into (tens of) thousands of pounds, but they wouldn’t be able to use the money in your estate to do so.
As a result, many families are forced to take out loans just to cover this bill, which at an already upsetting time, may be particularly stressful. A whole-of-life insurance policy could help avoid this issue. The payout would provide the funds required to clear the inheritance tax bill without your loved ones needing to take out a loan or go into their own savings to cover it. This though, is reliant on the policy being written in trust.
Whole-of-life cover may also appeal if you are determined to leave some form of inheritance to your loved ones, or if you want to help with your funeral costs.
Some whole-of-life insurance policies will allow you to cash them in early to get some level of payout before you actually die.
Factors that determine how much your life insurance policy cash value is worth include:
How much you pay in premiums and how long you’ve held your policy for.
How the insurer has invested your money and how well the markets have performed for these investments.
How much the insurer will charge for withdrawing money from your cash value, cancelling your life insurance policy, or cancelling the investment portion of your policy. Be sure to check the terms of your policy as the surrender value of your policy may work out as significantly less than what you’ve paid in premiums over the years.
If you would like an adviser to review your existing cover and benefits, please get in contact.