Posted on: 06-10-2016 in Insurance
Most people don’t take out “Whole of Life” (or “Whole Life”) Insurance, so it’s not very well known. Far more popular is “Term” Insurance — which can be between five and ten times cheaper.
What’s the difference, then, between Whole of Life insurance and Term Insurance? Simple. Term Insurance runs out after a set period. After that period, the policy will pay out nothing when you die and cannot be cashed in. Whole of Life insurance, on the other hand, is guaranteed to last as long as you do. Your beneficiaries will get paid whenever you die.
Whole of Life policies hit controversy in the UK in 2010, with 1400 complaints being made to the Ombudsman over policies that the Telegraph says “were sold on wildly optimistic growth assumptions” with buyers finding out 20 years after regular investment, “that they will either have to treble their premiums or lose half the money they’ve invested.”
A newbie to insurance probably wouldn’t be too impressed by that incident as an introduction to Whole of Life policies. And there are certainly pitfalls involved, which is why taking expert advice is strongly recommended when looking at these products. What model you buy into is critical. With the popular model of the non-profit policy, for example, premiums are guaranteed to stay fixed – thus avoiding the nasty shock that faced complaining UK consumers back in 2010.
The process of looking through Whole of Life insurance options with an adviser or broker is definitely worth it. And here’s why!
This benefit is what distinguishes Whole of Life Insurance from Term Insurance. No matter what happens, your beneficiaries will receive a payout with Whole of Life. You don’t need to worry about a term running out with the policy being worthless after that term. Whole of Life offers real, but expensive, peace of mind.
A common way to ensure that your beneficiaries don’t pay UK Inheritance Tax (IHT) on the assets you pass on to them is to use a Whole of Life policy payout to cover the IHT bill. A technical necessity here is that the policy has to be written in trust, or it becomes liable to Inheritance Tax itself. As you would expect, the policy is generally arranged so that the payout amount matches the anticipated IHT bill.
This applies with policies with an investment element and makes a big difference over the long-term, particularly if the policy is set up to re-invest any dividends.
Once the ink is dry on your policy, that’s it! Your policy stays in place until you die, or choose to surrender it. And your provider is likely to be sympathetic in the event of you being diagnosed with a terminal illness, with some consumers being allowed significant proportions of their death benefit early.
With a Term policy, the money you have invested is not redeemable after the term is up. With a Whole of Life policy, some degree of principal protection is available but, if you surrender your policy, you will have to pay exit fees which may mean you do not get back all you have put in.
Policies differ over when you stop paying in. With some plans, you can stop paying when you reach a certain age although cover continues indefinitely. With other plans, you carry on paying indefinitely (although the premiums are likely to be smaller). Choosing between the two might boil down to what level of premium you can afford.
With Non-Reviewable policies, premiums are fixed over time. With Reviewable policies, which are less expensive, there is an element of future cost uncertainty:
the policy is reviewed after maybe 10 years, to see if premiums need to rise, such that the policy can eventually spit out the required payout. Premiums might need to rise if, during those 10 years, the underlying investments to the policy have performed poorly (which is what was happening in 2010 when the UK Ombudsman was hit by 1,400 complaints about Whole of Life Policies).
Leading retailer Moneysupermarket.com sees the range of Whole of Life insurance products divided into:
Non-Profit insurance policies are safer, but don’t offer the chance of any bonus as a result of the investments you would be making with a With-Profit policy.
Some people won’t go near Whole of Life insurance with a bargepole. It’s an emotive topic, largely because the surprise you can get half-way through a Reviewable Policy can be so financially nasty. With the policy holder already having invested for some ten years, he/she may be told all that investment stands to be lost unless their rate of investment perhaps doubled or tripled in the future (with the premiums having to rise as a result of the investment element of the policy not performing well).
Compared with Term policies and also other financial products, Whole of Life Insurance gets a lot of stick. There’s a big argument for example that, for US expats, a traditional 401(k) scheme or IRA offers more investment choice, more cash flow flexibility and more transparency than a Whole of Life insurance policy.
It is certainly true that the rate of return over the first years of a Whole of Life policy is inevitably poor because the provider will hold back funds to pay for your insurance in later years. This is how the model works, centring on the fact that insuring older people is more expensive than younger people, on account of their greater physical fragility.
There’s even an argument that you should always consider a convertible Term policy first as a matter of principle, because that will allow you to convert your policy into Whole of Life at a later date. In the meantime, you can enjoy paying the far smaller premiums of a Term policy.
As with all insurance, there’s also a bewildering option of products to choose from. It all hinges on making sure you understand exactly what you’re getting. And be definitive about what you want! That’s going to be tricky if you decide to go it alone and shop online — or even pick up a policy from the supermarket. For a really clear look at what the right Whole of Life policy means for you, the use of a professional perspective is required. Talk to an adviser.
And, as a last tip, however you proceed, consider taking out what is known as a “waiver of premium”. This is, effectively, insurance for your insurance! It covers you if you cannot make premium payments for your life insurance in the future.