Whole of Life vs Term-Based Life Insurance
Generally speaking, life insurance is term-based, meaning when a policy is taken out, you are covered for a specified length of time.
Premiums are paid each month during this set term and if you (the policyholder) die before the policy expires, a payout is issued to your beneficiaries.
Term-based life insurance comes in 2 common forms, level term and decreasing term.
Decreasing term life insurance – here the cover amount reduces over time, usually to mirror/cover a repayment mortgage balance.
Level term – here the cover amount remains fixed (or level) throughout the policy. Regardless of when you die, as long as it is during the term, the payout sum remains the same.
A less well-known option is whole of life insurance. This involves paying premiums for the rest of your life, however, when you die a payout is guaranteed for your loved ones.
As a result of a payout being guaranteed, whole of life premiums tend to be much more expensive for a similar level of cover.
Whole of life is a form of life assurance. In short, life assurance pays out when you die, whereas life insurance pays out if you die.
The obvious benefit of whole of life is that a payout is guaranteed. However, depending on your age when the policy starts and the age at which you die, it is possible to end up paying more in, than your beneficiaries will receive in the payout.
Despite the differences between whole of life and traditional life insurance, there are also some key similarities:
- Medical information is required on application
- Premiums must be kept up to ensure cover protection
- The younger you are, the cheaper your premium
- Smoking will impact the cost of your policy.
How to get the cheapest monthly premiums
Upon expiration of term-based cover, you can either renew your policy or risk being uncovered. The renewal is likely to bring with it higher premiums, due to your increased age.
Whilst this may initially make a whole of life policy more appealing, it is important to realise premium payments here can also change over time.
Some whole of life policies come with reviewable premiums. This means that after a certain period, usually 10 years, the premium can be reviewed by the insurer and potentially increase.
This is the most common complaint made to the Financial Ombudsman with regards whole of life. Therefore, it is important to review premium terms and opt for an insurer who provides fixed premiums. These may be more expensive at first, but are normally more cost-effective in the long run.
Generally, if you are young and in good health a term-based life insurance will offer the most cost-effective cover. This protection could cover a mortgage, as well as meet future living costs, if the worst were to happen.
Usually, the policy term will run until the house is paid off and/or the children are financially independent.
As you age, you are more likely to benefit from whole of life insurance, especially if you are in good health, as the payout is guaranteed. You may want to cover funeral expenses (average funeral cost £4,078, and the total cost of dying is £8,905) or leave an inheritance.
If you are 50 or older, but in poor health, an over 50s plan is probably more suitable, as it will guarantee acceptance (aged 50 -85) and there are no medical questions.
So which policy to choose?
Choosing between term-based and whole of life cover will always be subjective, as no one can see how long they will live or what the future may hold. Therefore, it is important to consider all of the factors and make an informed decision.
Think about your age, your health, your available budget and what it is you want to protect.
Remember, the best way to ensure you get the right policy at the best price is to compare multiple quotes.
You could do this yourself online. Alternatively, you can use an FCA registered life insurance broker, like Reassured, who will find you the cheapest quotes and never charge a fee.
This is a collaborative guest post.