Generally there are two types of life insurance, namely, ‘whole of life’ and ‘term’ insurance.
Term insurance basically provides you cover for the set period you have decided, this is typically between 10 to 25 years. In the event that you pass away in the covered period, then the insurance policy will pay out the “sum assured” – a predetermined amount decided at the start of the policy. In some cases, the policy will also pay out if you are diagnosed with a terminal illness.
In contrast, whole of life assurance provides cover for the whole period of your life and given it is an event that is certain to occur, the policy is called an assurance as appose to insurance. This policy requires the holder to keep paying premiums until the time of death/ advanced age at which point it will pay-out.
Unsurprisingly, as the whole-of-life cover is certain to pay it is more expensive then term insurance. It’s therefore advisable to compare for the best deal, especially as you could be paying the premium whilst you are in your 80s too. Most whole-of-life policies tend not to require further premiums after you have hit a certain age i.e. 80/90.
To find out what is included in your policy be sure to read the terms and conditions thoroughly.
Most whole-of-life policies have a fixed premium that is set at the start of the policy for a fixed amount of cover- meaning you know the cost and the sum assured. Some plans also have a fixed premium up to a certain age, after which point you are exempt from future premiums- which is ideal as you are likely to be retired.
Most whole-of-life policies are linked to some type of investment which means that the sum assured and premiums are fixed for around 10 years and then reviewed. So if the investment fund is failing to perform then the insurance company can reduce the sum assured or increase the premium. So it’s possible for the life insurance pay-out to be not enough or unaffordable.
It is up to the policy holder to decide the amount of premium which is to be invested, this investment will effectively affect the starting premium rate and risk of potential rises in the future.
Balanced or standard covers are the most typical, as they set out the premium on the axiom that no future rises will be required – but this is not for certain.
The surrender amount is the amount which is offered back to the policy holder if they wish to come out of the covenant with the insurance company. However, this amount is significantly less compared to the total premium; this is especially true if you wish to pull out earlier in the policy.
Do I need it?
Whole-of-life cover is not ideal for everyone, such as an elderly gentleman in his 70s, he may have already paid off the mortgage on the house and may have no dependants. But in some cases, people still want to get whole of life cover as the lump sum can be used by the family to pay for the Inheritance tax (IHT) or even to pay for funeral costs.
By writing the policy in-trust you can stop your family from having to pay inheritance tax (IHT) on the pay-out as the funds will not form part of the estate. What’s more the beneficiaries will receive the funds much quicker as you don’t have to pertain for a grant of probate.
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