Personal Financial Planning :  Whole of Life - Death and Critical Illness policies

What is a whole of life policy?

It is a plan which guarantees to pay out a sum assured in the event of death, no matter how old you are when it occurs, as long as the premiums have been kept up-to-date.

How does it work?

Each month you pay a contribution, which the insurance company splits into two parts.

Part of it goes towards paying a risk premium, which covers you for life assurance, usually based on a 10-year renewing term assurance.

The remainder buys investment units in a fund, which will hopefully grow and build up into a reasonable size over the same 10-year period before renewal.

At renewal, the insurance company re-costs your life assurance (or critical illness insurance) using your age (now 10 years older) then calculates whether the contribution you are currently making and growth on the fund accumulated so far, will be enough to meet the new premium for the next few years.

If it is not, then they may well raise the premium, but if it is, the premium will stay the same for the next few years, until the next review period. After the first 10 years, some policies are reviewed more frequently on a 5-year or even annual basis. They cannot, however, refuse to insure you if you have become ill since you started the policy.

Obviously, the more money that you invest into the savings part of the arrangement, the less likely you are to have an increase at review at year 10 or in subsequent years.

Insurance Companies have, therefore, devised different levels of cover which you can choose, depending on your budget.

If you have only a small amount of money to spend on life assurance, then you would look at a 'maximum' cover plan, whereby a lot of the premium goes towards paying the life assurance and not much goes into the savings plan. It is likely, therefore, that after 10 years, you will need to pay quite a sizeable increase in premium and, possibly, more increases at each review in the future.

If you have a reasonable budget and can afford to pay a little more into the savings part of the plan, the insurance company may offer you 'standard' cover. This is designed to produce a fund sufficient to keep your premiums level after the 10-year review, depending on the insurance company's assumptions of the growth that they are going to make in the future on the investment fund part of the plan.

The premium may be based on a growth rate of 6% per annum for example, and if this rate is returned after expenses, then your premium should not rise at 10 years.

Other levels are available from some companies, such as 'career' cover which is designed to last up until the day that you retire and this can be quite useful if you feel that you will not need life assurance cover once you have a pension coming in.

'Career' cover is somewhere between 'standard' cover and 'maximum' cover in terms of premium cost.

What can I insure against?

You can insure against death, of course, and this is useful for Inheritance Tax Planning or simple family protection. It can also be used for loan cover.

You can also insure against critical illnesses, such as cancer, heart attack, stroke, total permanent disability, etc. What generally happens is that if you are diagnosed with a critical illness and survive 28 days, then a cash sum will be paid to you, to help clear a mortgage or just to help you adjust to the changes you will have to make due to the illness.

It is possible to buy plans that cover you for critical illness or death and there are various ways of structuring these, again depending on your budget, which we can help you to investigate.

Whole of Life insurance is incredibly useful, since if you take it out when you are fit and young, it can not be taken off you, as long as you keep the premiums up for the rest of your life. If you, therefore, become uninsurable when you are older, you can maintain cover without having to worry about underwriters.

Whole of Life insurance is also useful in trust planning to ensure that monies are available immediately outside your Estate to support spouses and children or pay Inheritance Tax bills.

Whole of Life insurance is one of the most useful forms of life assurance and high levels of cover can be provided at very low cost (subject to the 10-year review and subsequent reviews).

In closing I must remind you that the investment part of the fund buys units in the insurance companies life assurance funds. These units can fall as well as rise in value and if you decide to stop the plan and encash the policy in the early years, you will almost certainly get less than you paid in to it, as a life assurance cost will have been deducted.

It is important to select the right fund (if you are given the option by the insurance company), to ensure that the first 10 years of the plan gives you growth rates that are likely to exceed those needed to maintain the cover at the review.

There are also plans available which offer guaranteed benefits and fixed permiums for life (i.e. with no review periods).

For further advice and information, please feel free to contact us .