Whole Life Cover

If you don’t want to take out life insurance for a set term, but want it to last a lifetime, one option is to take out whole of life insurance.

This type of policy doesn’t have an end date, so you keep on paying premiums until you die at which point the policy will pay out (some policies require premiums to be paid only until you achieve an advanced age – perhaps 85).

As a pay-out is certain, this type of cover is much more expensive than term insurance.

The way this cover works is more complicated too, as some of your premiums will go into investment funds and some towards buying life cover. This means that the amount your dependents will receive when you die will be vary depending on how the underlying investment has performed.

Because of the way it is designed, whole of life insurance is not intended to provide for the unexpected and premature loss of an individual. It is often used for complex financial and tax planning needs.

Some term insurance policies can be converted to whole of life policies, known as convertible term insurance. Premiums for this type of policy are higher than for conventional term insurance policies, and once the policy converts, they are likely to increase.

Protect your life policy from the taxman

No-one wants to hand over money to HM Revenue & Customs if they can possibly avoid it, so make sure you ask your life insurer to write your policy ‘in trust’ when you take it out.

If the plan is written ‘in trust’ then this money will not be added to your estate, and therefore any pay-out won’t be liable for inheritance tax (IHT).

Under current tax rules (2016/17 tax year), the IHT threshold is £325,000 for a single person or £650,000 for married couples and registered civil partners. IHT is charged at 40% on anything you leave over this threshold when you die, which means millions of homeowners risk leaving a tax bill for loved ones when they die. I’d reword this as there are other factors i.e. RNRB for example.

Putting your life insurance ‘in trust’ not only means any pay-out is excluded from your estate for IHT purposes, but also that your dependents will receive the money faster. If the policy isn’t written ‘in trust’, the executors of your will must apply for a grant of probate, which can take several months.