Whole of Life Policies
These are policies that are designed to provide life assurance for the whole of your life.
Small sums are often used to cater for funeral costs, but otherwise their use is largely limited to niche applications (eg to provide funds to meet any expected Inheritance Tax liability).
Important technical detail – for actuarial reasons they are designed to strike a balance between a savings element and an insurance element and are usually reviewable by the provider at certain intervals. Since the life office must pay out on death of each life assured, this raises a number of important points that can have a big impact on any quote, but also risk leading you to make a mistake:-
1) Most policies in this category include a small investment element. The assumption about the rate of return on the investment element will change the premium. If one company assumes 4%pa and another 6%pa, then the company assuming 6% will produce a lower quote. But if they fail to achieve 6% there will come a time when they tell you they need to increase your premium. This may be years in the future, when you cannot afford to do so, and for health reasons cannot change providers.
2) They may make an assumption that you will die by a certain age. As with the rate of return, assuming an early death enables the company to quote a lower premium.
If you are purchasing a Whole of Life policy and you want to be as sure as possible that the full anticipated benefits will be there when you die, make sure that you understand the basis on which quotes are being prepared, and that they are all prepared on the same basis (or at least the same rate of return assumption, the other details tend to be fixed for each company's systems).
Take note of how long you will need to keep paying premiums to keep the policy in force (into retirement?) and note that the investment element, which can produce a surrender value, is only small. Whole of Life Policies are primarily insurance policies not savings plans.
Last updated on April 11, 2008