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What is whole life insurance and how much does it cost?

Updated 08 April 2021

7min read

Nick Green
Financial Journalist

life assurance

A whole life insurance policy pays out a guaranteed lump sum when you die, no matter when your death takes place. This makes it different from other types of life insurance, which are time-limited. Whole life insurance is therefore more pricy, but for some people, the cost is worth it.

What is whole life insurance?

Life insurance is designed to give you peace of mind that if you die, your loved ones will receive a lump sum. This is very important if you are a major or sole earner in your family, as otherwise your death could leave your family without enough money to live on.

When you take out life insurance you pay regular premiums on a monthly or annual basis, and in return the insurance provider agrees to pay out a cash sum if you die while the policy is active (as long as you meet all of its terms and conditions).

A whole of life insurance policy guarantees that an insurer will pay out a lump sum to your loved ones when you die, no matter when this happens. As the pay-out (on your death) is assured, this kind of policy is sometimes referred to as life assurance.

This makes whole life insurance very different from level term or decreasing term insurance. A term insurance policy is arranged for a set time period – such as 25 years to cover your mortgage – with a policy end date. Once a term insurance policy comes to an end, there's no cash pay-out, since it only pays out if you die during the term of the policy. If you want to continue cover, you'll need to take out a new term insurance policy.

How does whole life insurance work?

You can buy a whole of life policy using monthly or annual payments or a one-off sum and you'll remain covered until your death, as long as you pay the premiums. Some policies may be designed so that you can stop paying into them when you reach a certain age, such as 90, or after a set period, perhaps after 30 years. 

The two main types of whole life cover are:

Balanced cover

With balanced or standard cover, your premiums will stay the same for the duration of your policy. This means you'll pay the same amount as you get older, even if you start to experience health problems. The pay-out will also be fixed, and you’ll agree the amount with your insurer at the start of your policy.

Maximum cover

A maximum cover policy is linked to an investment fund. Your insurer will invest the money you put in each month, with the intention that the returns they generate will cover the pay-out.

Investments are usually made into:

  • A unit-linked fund (made up of units of shares, bonds, property and cash).
     
  • A with-profits fund (a 'pooled investment' fund where your money is invested along with other investors funds into stocks, shares, equities, bonds and property over a specific period).

Your insurer will have regular fund review dates. They’ll check that the fund is performing well enough to cover the pay-out. And if it isn’t on track, they might suggest increasing your premiums contribution or reducing your cover amount.

What does whole life insurance cover?

Like a term life policy, whole life insurance pays out a death benefit that can be used by beneficiaries for any purpose they choose. Typically, these include funeral costs, debts, inheritance tax liability, mortgage payments or anything else affected by loss of an income if you die before retirement age. 

You could also consider a joint life insurance policy. This covers two people but pays out for just one death and is designed to protect the financial future of the remaining one of the couple. This usually comes in the form of a lump sum payment, which can be used to pay off a mortgage, or cover other debts and financial commitments.

Some options will give you a discount in the early years of the policy to make it cheaper at the beginning. Others may offer add-ons such as cover that you can access early if you can't look after yourself due to illness or dementia.

If you're tempted to try and get some level of pay-out before you die, check the terms of your policy first, as the surrender value may work out as significantly less than what you've paid in premiums over the years. There may also be associated charges.

What does whole life insurance not cover?

The exact details of what is covered by a whole life insurance policy will depend on the insurer and on the type of policy you choose. For example, some policies may not cover certain causes of death. It's essential to study the small print and be aware of any exclusions and limitations, or your loved ones may be left with less than you expect.

When you're considering what cover to choose, it's important to ask these questions:

  • Will you need to make regular payments for life?
  • Will your premiums stay level, and, if so, for how long? 
  • Can the cover be flexible, for example, could you reduce it if your financial commitments get smaller due to paying off your mortgage?
  • What happens to your premium when the policy is reviewed?
  • What are the charges or penalties for cancelling your policy?
  • How will you be protected if you're no longer able to pay the premium?
  • What are the exclusions that might prevent a pay-out (for example, certain causes of death such as suicide or drug abuse)?

How much does whole life insurance usually cost?

The cost of a whole life insurance policy can be affected by many things such as your age, height, weight, if you're employed in a high-risk job and if you smoke, but the main one is likely to be the amount of cover you choose. And, because the pay-out is guaranteed, this form of protection is one of the most expensive.

Industry research suggests that average monthly premiums on whole life insurance range from £40.68 at age 30, £62.43 at age 40 to £106.28 at age 50, depending on your individual circumstances and type of cover you choose.

When comparing the national average cost of life insurance, a 30-year-old will pay 640% more for whole of life insurance in comparison to 30 years of mortgage life insurance. As age increases, the percentage decreases on national average, with a 50-year-old only paying 225% more for whole of life insurance in comparison to mortgage life insurance.

Is a whole life policy worth it?

The attraction of whole of life insurance is that you're guaranteed a pay-out, so you're safe in the knowledge that, whenever it happens, your loved ones will receive a fixed lump sum when you die. But, because of this, you typically pay a higher premium.

Some whole life insurance policies only provide you with life assurance, while others are linked to an investment. This acts as a form of equity, and you can cash in some of its value as the fund grows. The death benefit won't be affected by withdrawals because it's intended to be a separate benefit for you to use. And if it's a qualifying policy, your withdrawals will be tax-free.

A whole of life policy has additional benefits. For example, it can protect your family from inheritance tax. Currently, if your estate is more than £325,000, inheritance tax is charged at 40%. Life insurance pay-outs are usually subject to inheritance tax because they're added to the estate and, if all of that combined exceeds the IHT threshold, then 40% tax is payable. However, you can get around this by writing your policy into a trust, which could make a substantial difference to any dependants. However, trusts are a specialist area, so be sure to consult a financial adviser first, and a solicitor when setting one up.

Other options to consider

If you only need cover for a set period of time, for example to cover your mortgage term, a level or decreasing term life policy might be more suitable.

If you don't have dependants, it may be better to opt for stand-alone critical illness cover or income protection insurance that provides a financial benefit if you're unable to work due to a critical illness or redundancy.

Other alternatives include over-50s life insurance. This is available for everyone aged 50 to 80 and doesn't require any medical questions or assessments. Premiums are usually fixed and will stop at the age of 85 or 90, with cover continuing for the whole of the policy holder's life. There's also funeral cover, which pays out a lump sum when you die specifically to cover your funeral expenses.

How can I get the best deal on a whole life insurance policy?

As with most things, it pays to shop around. Taking out too much life insurance could mean that your premiums end up higher than the pay-out you need. On the other hand, underestimating the cover you need means your family might not be left with enough money in the future. Consider these questions: What payments will they need to cover? How much will they need to live comfortably? Will their own ability to earn be affected if you die? When researching a whole of life insurance policy, think about:

  • Amount of cover: How big do you want the pay-out to be? For whole of life insurance, UK companies will mostly let you choose any amount, but the higher the pay-out, the more expensive the premiums.
     
  • Your age: This could affect the price of your monthly payments. The older you are, the more expensive your whole life insurance will be.

How is whole life insurance paid out?

A whole of life insurance policy will pay out a sum of money when the policyholder dies, whenever that is. The beneficiary should contact their insurance provider as soon as possible after the death of the insured person and will need to have all the documentation to support their claim. The life insurance claims process has three basic stages:

1. Notification

This is when you first contact the provider to start the life insurance claims process. The beneficiary will need the policy number, information about who they are, details of their relationship with the insured person, and the contact details of the insured person’s doctor.

2. Assessment

Usually a claim form must be completed and returned to the insurer. Depending on the type of claim, they may ask for more information, such as a death certificate.

3. Pay-out

When all the paperwork is completed, payment is made to the named beneficiary. Life insurance pay-outs are usually subject to 40% inheritance tax if the deceased's total estate exceeds the £325,000 threshold, unless the policy is written into a trust.

A financial adviser can help you choose the right kind of life insurance for your needs, and guide you to the most cost-effective policies. They can also help if you have special circumstances, such as health conditions or lifestyle factors that make you difficult to insure.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.