What is a whole of life insurance policy?

If you take out a whole of life insurance policy, you can expect to get a payout when you die. Here is how it works and what types are available.

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Whole of life insurance offers a great deal of security to family members you leave behind. It helps to ensure that they can adjust to life without you, safe in the knowledge that it will cover significant outgoings, such as mortgage payments, and of course funeral costs. 

What is a whole of life insurance policy?

A whole of life policy is a form of life insurance that pays out when you die.

These options usually cost you more than any other type of life insurance because the policy lasts your entire life, meaning you will receive a sizable payout, providing you abide by the terms and conditions.

What types of whole of life insurance policies are there?

There are three types of whole of life insurance policies:

  • Non-profit: You pay fixed monthly premiums until you die. You agree on the payout amount when you take out the policy. Compare non-profit whole of life insurance policies here.

  • With-profit: You pay fixed monthly premiums, which your insurer invests in stocks and shares. Depending on market performance, you could end up with more or less of a payout compared to a non-profit policy.

  • Unit-linked: Your monthly premiums are based on the payout amount you choose. However, the insurer invests your premiums into the stock market meaning you may need to pay in more if the policy's investments underperform.

What is a low-cost whole of life policy?

A low-cost whole of life policy is a type of with-profit policy. It pays out a guaranteed amount, or the investment value of the policy, whichever is highest when you die.

How do whole of life policies work?

You pay monthly premiums until you die, then your family make a claim on your policy and the insurer pays out.

Signing up to pay a sum over every month until you die, potentially at a relatively young age is quite a commitment, after all, none of us knows what our circumstances will be in the future. For this reason, some insurers give you the option to review your policy after a set amount of time, such as 10 or 15 years.

This gives you the opportunity to increase or decrease the cover you have on your policy, for example:

  • You might increase the cover if you have had children and want a bigger payout to cover them.

  • You might decrease your cover if you had chosen a payout amount to match your mortgage, but your financial circumstances have changed, perhaps resulting in you owing less and no longer needing so much cover.

With the review option, even if you don’t need to change the amount of cover, your premiums are still likely to go up due to your age and health.

Do whole of life policies always pay?

They should do, otherwise, there’s little point in going to all the trouble and cost of taking one out. But there are occasions when an insurer won’t pay up. These include:

  • If you lied when you set up your policy: The most common reason for insurers not paying is the non-disclosure of personal details. For example, holding back on medical conditions, or your family's medical history.

  • If your cause of death is not covered: Check what causes of death are covered by a policy before you apply. Each policy has a list of exclusions that mean you will not get a payout, such as an alcohol or drug abuse-related death.

Should you buy whole of life insurance?

If you only need life insurance to cover a set amount of time, such as the years remaining on your mortgage, then a whole of life policy may not be the most cost-effective option. This is because the insurer guarantees a payout, and to ensure they stay in business the premiums you pay are relatively high. Also, if you stop making payments when you’re mortgage-free, you lose your life cover benefits.

That said, premiums are cheaper when you’re younger, so if you’re interested in this type of insurance, it pays to sign up sooner rather than later.

Here are some pros and cons of a whole of life policy:

Pros of whole of life insurance

  • It can give your family a lump sum of money to support them after your death

  • Providing you follow the rules, it will provide a guaranteed return after your death

  • It can help cover the cost of any inheritance tax due on your assets

Cons of whole of life insurance

  • Live long enough and you could end up paying more into a policy than you get out

  • You do not get a payout if your cause of death is not covered in your policy

It’s a big commitment, especially given the many years you’d expect to regularly and consistently pay, without missing a month.

If you only want cover while you have a mortgage or until your children move out, you could consider a term life insurance policy instead. This will work out cheaper as you pay in for a fixed period, of say 20 years, rather than until you die.