Whole of life insurance can supply your family with a lump sum upon your death. As long as you keep paying into it, it is guaranteed to pay out.
Because it will always pay out – as any policyholder will one day pass away – it is also sometimes known as life ‘assurance’.
It’s not suitable for everybody, and you may wish to research level term and decreasing term insurance before deciding what kind of policy is right for you.
What can it be used for?
The lump sum that your loved ones receive could help your family to cover things like funeral costs, or the inheritance tax bill. Or you might just like the idea that your loved ones will receive one last ‘gift’ from you.
If at any point you stop paying into the policy, you will no longer be covered.
What you need to bear in mind is that you may end up paying in more to the policy than what is eventually paid out.
I no longer want whole of life cover
The premiums paid for whole of life cover can be reviewed and increase as time goes on. So it could get quite expensive.
If you don’t want the cover any more, you could just stop paying and cover would cease.
Some policies allow you to cash them in. The money that you’ll get back could be far, far less than what you’ve paid in.
So if you’re looking at buying a whole of life policy, you need to take a look at the potential cash in value just in case you change your mind later on.
Is there another way to leave a lump sum?
If you just want to leave a lump sum that is not intended for a specific purpose, you could leave your family a nest egg through saving and making investments.
All the money that you would have spent on premiums could instead be put into tax-efficient ISA accounts or another form of savings. However, this will form part of your estate on the event of your death.
Your estate will be valued, and inheritance tax will have to be paid at a rate of 40% on anything over £325,000. Be aware that any savings you build up might push the value of your estate over this limit.
This doesn’t sound like it’s right for me
If a whole of life policy is not what you were looking for, you may be more interested in fixed-term policies.
These last a set period of time, during which you pay a monthly premium. You can arrange a level term policy, where the insurer would pay a lump sum in the event of your death. That lump sum remains the same, whether you die in the first or last year of the policy.
Or you can arrange a decreasing term policy, which is generally cheaper than level term. The sum paid out decreases as the term goes on. This is also sometimes called a mortgage term policy, because it is popular with mortgage borrowers - the lump sum paid out decreases as your mortgage debt does, ensuring your family will at least have enough to cover the remaining payments