The Which? website has a brilliant guide for all the different types of 'Life Assurance':
Follow our handy guide to life insurance that won't expire until you do
You probably think that life insurance is something that pays out when you die and that's that. But, as with all things financial, it's not that straightforward - it depends what sort of policy you choose. The most common type is term insurance, which pays out only if you die during the policy term. There's also another type, known as whole-of-life insurance. As the name suggests, it's designed to provide cover to last for the whole of your life, so it will pay out whenever you die.
Is It for You?
Whole-of-life insurance probably won't be the first choice to meet your core insurance needs. Before you make any decisions about life insurance, think about why you need cover, how long for, and what premiums you can afford. The table gives details of the main types of life insurance, and situations when you might use them. With term insurance, you choose how long the policy will run (for the length of your mortgage, for example). Only if you die during this term does the policy pay out. Because it may never have to pay out, term insurance is the cheaper option.
Whole-of-life can sometimes be more flexible than term insurance. With some policies, you can increase or decrease the cover to match the different needs at different times of your life. Another feature of most whole-of-life policies is that your premiums are invested so they may build up a value. This means that, if you stop paying premiums, you might still get something back - and you don't need to die to claim it. It's unlikely to match what you've paid in, though, especially in the early years, so this isn't a substitute for a savings plan.
Insurance companies do offer whole-of-life policies that are designed purely as investments or savings plans. But, in this article,we're looking solely at policies offered to meet life insurance needs. There are three main types - non-profit, with-profits, and unit-linked. See the table for the main providers and examples of monthly premiums.
Types of Life Insurance Policy
How It Works Useful For
Term Insurance (level)
Life cover and premiums stay the same during a specified term. Policy pays out only if you die before the end of the term. Mortgage protection (especially for interest-only mortgages), or to provide a lump sum (or an income in the form of family income benefit) for dependents.
Term Insurance (decreasing)
Works in the same way as level term (above), but the level of life cover reduces by a set amount each year. Mortgage protection for repayment mortgages (where the amount you owe reduces). Could also help with paying inheritance tax on gifts made during your lifetime.
Term Insurance (renewable)
Similar to level term (see top) but usually taken out for five or 10 years initially. There's an option to renew at the end of the term (usually up to age 65), though premiums may well increase. Family protection where you need a high level of life cover for a short period at a relatively low cost. It's also useful if you think you may want to renew cover at the end of a term.
Whole-of-life Insurance (non-profit)
Provides a fixed level of cover that's paid whenever you die. Premiums are guaranteed not to increase. Plans do not build up a value at any time. See 'Non-profit'. Family protection, inheritance tax planning, or to leave money to beneficiaries. May suit people who want a set amount of life cover to remain in force for a guaranteed cost.
Whole-of-life Insurance (with-profit)
Similar to non-profit (above), but the payout includes any investment bonuses that have been added to the policy over the years. See 'With-profits'. Inheritance tax planning, or to leave money to beneficiaries. But it's much more expensive than unit-linked standard-cover plans (see below).
Whole-of-life Insurance (unit-linked maximum cover)
Provides a high level of cover for a set premium. Reviewed after ten years, at which point either the premium will rise, or the cover will reduce. See 'Maximum cover'. Family protection where you need a high level of life cover for a short period, though renewable term insurance may work out cheaper.
Whole-of-life Insurance (unit-linked standard cover)
Designed to keep your chosen level of cover in place, though the policy must achieve a certain level of investment growth. See 'Standard cover'. Inheritance tax planning or to leave money. Suitable if you accept that your investment may not grow by the required rate.
Whole-of-life vs Term Insurance
Monthly premiums for
life cover of £100,000 Man
aged
30 (£) Woman aged
30 (£) Man
aged
40 (£) Woman aged
40 (£) Man
aged
50 (£) Woman aged
50 (£)
Whole-of-life unit-linked
policy (maximum cover) 15 15 18 15 47 28
10-year level term
insurance policy 7 5 9 7 22 17
10-year renewable term
insurance policy 7 7 10 8 23 18
Notes
The table shows the monthly premiums for whole-of-life, level term, and renewable term insurance for non-smokers. Premiums are the lowest from our survey of providers.
The whole-of-life plan is more expensive in all cases. As with renewable term insurance, whole-of-life won't automatically end after ten years. However, unlike with most renewable term policies, you can continue whole-of-life policies after age 65.
The whole-of-life unit-linked and renewable term premiums are based on current ages. Premiums for level term policies are for ages next birthday. Rates are correct at 1 November 2003.
Non-profit and With-profit Policies
With most of these policies, you choose the level of life cover you need when the policy starts, and this amount is guaranteed to be paid when you die. The premium you pay is also guaranteed not to increase. You have the benefit of knowing exactly what your cover will cost, but you can't normally increase the level of cover after the policy has started.
Non-profit
This is possibly the most straightforward type of whole-of-life policy. You pick a guaranteed level of cover when you take out the plan, and your monthly premium remains the same throughout your life. However, your premiums don't build up any investment value so, if you stop paying your premiums at any point, you'll get nothing at all in return. This makes non-profit policies relatively cheap - usually half the price or less of their with-profits equivalents.
With-profits
If you take out a with-profits policy, there's the chance that your life cover could increase if your insurer's investments do well. A bonus is calculated based on the investment return on your insurer's with-profits fund, and can be added to your policy at regular intervals. So the final payout might end up being higher than the level of cover you initially chose.
Be warned, though, that bonuses on all with-profits policies have fallen sharply over the past three years, so don't count on them to boost your life cover. If you do opt for this type of plan, make sure you set up the policy with the life cover you think you need, rather than taking a gamble that you'll receive a juicy bonus.
As the table shows, with-profits whole-of-life policies can cost you more than twice as much as unit-linked and non-profit policies. You're paying for the security of knowing that the premiums won't increase, as well as the fact that your policy may build up a value. However, with premiums at around £300 a month for a 50-year-old, they're out of the reach of most people.
Norwich Union's whole-of-life policy is a with-profits plan with a difference. For details of how it works, see 'Premiums Compared'.
Unit-linked Policies
Here, your premiums buy units in an investment fund. The premium you pay, or the pay out you receive, can be affected by investment returns, so these policies are more risky than with-profits or non-profit policies. They're also more flexible, allowing you to increase the amount of cover after the policy has started. If you do increase cover, the company will take your current state of health into account when deciding your premiums. However, some companies offer a 'medical-free' increase at specific events, such as when you have a baby, increase your mortgage, or if your inheritance tax liability increases. There are two main types of unit-linked plan, known as maximum and standard cover.
Maximum cover | Standard cover
Maximum cover
This provides the highest possible level of life cover for a given premium - or the lowest possible premium for a given amount of life cover. You choose either the premium you can afford or the cover you need. The insurance company then does its sums, taking into account your age, gender, state of health and whether you smoke.
So, if you need life cover of £50,000, the insurance company will work out the lowest premium you can pay to ensure this level of cover. Alternatively, if all you can afford is, say, £50 a month, the provider will calculate the maximum cover this can buy.
Maximum cover plans can be good value for the first ten years. At the end of this time, though, the insurance company reviews the plan and may decide that you either have to pay a higher premium to keep your level of cover in force, or reduce the cover. Most companies then review plans every five years.
The benefit of a maximum-cover policy is that you can initially get a high level of cover for a relatively low price. But you have no way of knowing by how much your premium might increase when the policy is reviewed. It might be worth considering if you want a high level of cover for a short period of time, but compare costs with a renewable term insurance policy.
top
Standard cover
This type of policy is often used to help cover inheritance tax liabilities (see 'A Plan for Death and Taxes'). The premiums are designed to remain the same throughout your life. However, unlike non-profit and with-profits policies, there's no guarantee that they won't increase at some point. This depends on stock market performance.
You choose the level of cover you need when you first take out the plan, and the insurer calculates your premium, based on the usual criteria like age and health. It also assumes your premiums achieve a certain level of investment growth. Three of the companies we looked at use a growth rate of 6 per cent a year. The others use 6.25, 6.5 and 6.75 per cent (see table). With higher assumed growth rates, premiums may be lower, but there's more risk that the investment will fall short. If your policy doesn't achieve the required growth, you'll have to either increase your premium or reduce your life cover at some stage.
Premiums Compared
Of the unit-linked policies shown in the table, Skandia Life and Scottish Provident offer the best overall rates based on a future investment growth rate of 6 per cent. Standard Life doesn't differentiate between smokers and non-smokers so it's poor value if you don't smoke.
The premiums for the non-profit Canada Life policy compare well with the best unit-linked plans. This policy also has the added benefit of a guarantee that premiums won't rise, but it won't build up an independent value.
The Norwich Union plan is different from the other with-profits policies. It's cheaper because it doesn't guarantee that the full cover of £100,000 will stay in force throughout your life. The £100,000 level of cover is guaranteed for the first ten years, but after that the insurer reduces this to a minimum level of cover. If the plan pays out after the first 10 years, the amount paid will be the minimum level of cover plus any bonuses that have accrued.
A Plan for Death and Taxes
The idea of using an insurance policy to cover a tax bill that occurs after you die isn't new. Whole-of-life plans have been used for this purpose for years. In this case, you set up the policy so that an amount equal to your estimated inheritance tax (IHT) bill will be paid out on your death. IHT requires your estate to pay 40 per cent of the value of any assets you have over £255,000. See 'Inheritance Tax Planning', for an example of how whole-of-life insurance could be used in this way.
The insurance company writes the policy under a simple trust. Because it's controlled by a trust, the money paid out isn't included in your estate when your inheritance tax bill is calculated. This also makes it a good way to leave money to your children or grandchildren (or anyone else) tax-free when you die. If you set up a plan for this purpose, make sure you review it regularly to check that the amount of life cover is still at the right level. Couples should set up the policy so that it pays out on the second death.
Policies Compared
Whole-of-life Insurance Policies - file size approx. 20K
Health Matters
Buying life cover is complicated enough when you're in good heath, but what chance do you have if your health begins to deteriorate?
It's often only when you have a health crisis that you realise you don't have enough life cover, or that your cover's just about to end. That's where renewable term insurance and whole-of-life insurance can come into their own. They allow you to keep your life cover in force whatever the state of your health. By contrast, you may find that insurers won't let you take out a level term life insurance policy within five years of a serious illness.
Renewable term insurance policies don't usually take into account your health when you renew the policy, but, with most, you can renew the policy only up to the age of 65.
With non-profit and with-profits whole-of-life policies, your premium remains the same until you die. With maximum cover unit-linked policies, your premium is assessed after the first ten years, based on your current age and state of health. The new premium may be high but, if you can afford it, you can keep the cover in force indefinitely. Some unit-linked plans offer medical-free increases for times when you need extra cover.
Inheritance Tax Planning
Mary is 65, widowed and has three children. Until recently, she didn't think about inheritance tax (IHT) at all, as she felt it wouldn't affect her. However, she recently had her house valued and was shocked (though pleased) to find out that the house she and her husband bought for £70,000 20 years ago is now worth around £380,000. She has paid off her mortgage and has a reasonably good pension.
The tax bill
If Mary died tomorrow, her children would face an inheritance tax bill - based mainly on the value of her house - of around £50,000. Her children don't have such money readily available, and IHT quite often has to be paid before the proceeds from any property sale come through. A whole-of-life policy written in trust for her children could be the answer. Skandia Life, the company that gave us the cheapest quote for a unit-linked plan (see table), quoted Mary £124.34 a month for total cover of £50,000.
Flexible future
Mary is currently very independent, but circumstances can change. If, in ten or 15 years, she wanted to move to a smaller home or to sheltered accommodation, or needed to go into care, she might sell her house and use the proceeds for care home fees or to pay for care at home. Alternatively, the threshold above which IHT is paid (currently £255,000) might be increased. So what would happen in the future if there's no longer an IHT bill to worry about? There are two options. The plan could be cashed in for whatever value it may have built up. If the policy achieved 6 per cent a year growth, Skandia estimates it would be worth £4,010 after five years or £9,520 after ten years. Alternatively, Mary's children could take over paying the premiums and keep the plan as part of their inheritance. The policy would still pay out its £50,000 on Mary's death, but the children could simply share the money, rather than having to use it to pay a tax bill.
Don't take steps to avoid inheritance tax if it would put your current income or lifestyle in jeopardy. A whole-of-life plan can give peace of mind but, before you embark on any inheritance tax planning, speak to a specialist independent financial adviser and/or a solicitor.
Our Verdict
For most people, whole-of-life insurance isn't the right choice for core life insurance needs such as covering mortgage payments or providing for dependents. This is for the simple reason that whole-of-life policies are more expensive than term insurance policies, which can do the same job.
Whole-of-life insurance might have some part to play in your financial planning - but make sure that you can afford the premiums without compromising your other insurance or spending commitments.
If you want the certainty that your life cover will always be there, and want to know exactly what it will cost, a non-profit plan might be the answer. A with-profits plan gives you the same guarantees, together with the possibility of a larger payout, and the fact that you may get some of your premiums back if you change your mind. But you pay a lot for these extra benefits. Unit-linked plans are less expensive and offer more flexibility, but they aren't as cheap as term insurance policies, and there's always the possibility that premiums may increase to prohibitive levels.
Whole-of-life plans mainly come into their own for inheritance tax planning, where they can provide a relatively flexible way to deal with what's increasingly becoming a concern for many people.
If you want to take financial advice to help you work out your protection needs, we suggest - as always - that you consult an independent financial adviser. See 'Contacts' for useful numbers.
Contacts
Canada Life
0845 6060708
www.canadalife.co.uk
CIS
08457 464646
www.cis.co.uk
Ecclesiastical Life
01452 528 533
www.ecclesiastical.co.uk
Legal and General
08700 104080
www.legalandgeneral.com
Norwich Union
0800 0927750
www.norwichunion.co.uk
Prudential
0800 000000
www.pru.co.uk
Royal Liver
0800 0929808
www.royal-liver.com
Scottish Provident
0131 348 1188
www.scotprov.co.uk
Skandia
02380 334411
www.skandia.co.uk
Standard Life
0845 6060191
www.standardlife.com
Zurich (Allied Dunbar)
01793 514514
www.zurich.com
Contacts for IFAs
IFA Promotion
0117 9711177
www.unbiased.co.uk
SOFA
020 7417 4442
www.sofa.org
Further information
FSA Consumer Helpline
0845 606 1234
www.fsa.gov.uk
ABI Consumer Helpline
020 7216 7455
www.abi.org.uk