What is Whole of Life insurance?

A whole of life policy provides protection for a client for life, with the sum assured being payable on death at any time.

There are a few types of whole of life policies:

A traditional with profits policy provides a guaranteed sum assured, with an additional bonus on top of that. Your premiums will go towards both the insurance cover and the investment. The way it works is that the sum assured is guaranteed by the insurance company. Every year, the company will add reversionary bonuses, a percentage of the sum assured, depending on how the company's funds performed each year. At the policy's end, the insurance company adds a terminal bonus, which will reflect the performance of the life fund in the previous year. Neither the reversionary bonus nor the terminal bonus is guaranteed.

One of the common problems with the with profits policy is that the smoothing out of bonuses is a secret practice, and insurance companies can draw a veil over what they do, so you never know if you are receiving a satisfactory or fair bonus. This is not the case with the unitised whole of life policy.

The unitised whole of life policy provides the greater of the value of the with profits units or the death benefit. Throughout the life of the policy, you are provided with a choice of the level of death cover. This could be minimum, standard or maximum death policy. Once you have made this choice, your premium buys units in a fund, which you can select at the offer price. These units are then cancelled in order to buy death cover. Periodically, a premium review will be undertaken in order to enable the death cover to continue at the same level by keeping a sufficient reserve.

If you want to lower your premiums, then you can buy a low cost whole of life policy. This combines decreasing term insurance with a whole of life with profits fund. As bonuses are added to the with profits fund, the amount needed for death cover decreases, allowing the sum assured by the decreasing term insurance to decrease, and the premiums along with it.

For an even cheaper whole of life policy, there is the non profit policy, with a guaranteed sum assured payable on death, but no investment value.

Finally, there is a universal whole of life policy. This is a unit-linked policy where units can be cancelled to buy permanent health, personal accident, critical illness and hospital income benefits in addition to life cover. This offers the advantage of the flexibility to cover both investment and protection needs. The price you pay is that you can only access these benefits through surrender.

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

Life Insurance

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