Life insurance is an important part of financial planning, protecting your loved ones in the event of your death. Although many of us will have taken life insurance in connection with a mortgage, these policies can also be beneficial in other scenarios. What is life insurance? What are the different types of life insurance, and is it better to choose a ‘whole of life’ or a term insurance plan?
In this article, our financial planning team at Vesta Wealth offers a short guide on life insurance policies. We hope you find this content useful and invite any questions you may have about how this could affect your financial plan, via:
t: 01228 210 137
e: [email protected]
What is ‘whole of life’ insurance?
A ‘whole of life’ insurance policy pays out a lump sum upon your death, regardless of when that is. Some policies require you to keep paying monthly premiums until your death, whilst others allow you to cease payments after reaching a certain age. By speaking with a financial planner, it is also possible to establish the policy within a trust which allows the lump sum to be paid to your beneficiaries via the trust, thus mitigating or even potentially eliminating inheritance tax (IHT) on the proceeds.
Whole of life insurance is different to term insurance, which only covers you for a specific period of time (e.g. 20 years). If you die after the agreed term of the policy, it will not pay out to your surviving loved ones.
When is whole of life insurance appropriate for a financial plan?
It may seem intuitive to opt for whole of life cover, rather than a term insurance plan. However, each has its advantages and disadvantages, depending on your financial goals and situation. Cost is also usually a key consideration. Term insurance tends to be cheaper than whole of life cover, although premiums are also affected by factors such as your age and health.
A whole of life policy might be appropriate for your financial plan under conditions such as:
- You want absolute peace of mind that your loved ones will receive a payout when you die, even if this might come at a higher cost.
- It is cheaper to pay the likely total premiums of a whole of life policy than pay the IHT bill which is projected to be levied upon the value of your estate.
- Those with a lifelong dependant (e.g. an adult or child with special needs) who is likely to need a large, liquid lump sum to help care for them when you are gone.
However, whole of life insurance is not for everyone. For instance, a financial planner may determine that the total premiums are likely to exceed your IHT bill, making it more sensible to simply pay the tax out of your estate rather than arrange insurance.
Others may require insurance which provides cover only for a fixed term, such as for the years your children are living at home (e.g. up to age 18), or until your mortgage is paid off.
How much does whole of life insurance cost?
It is difficult to give an estimate of the costs of whole of life insurance because so many factors influence it. Not only do insurers factor in your personal profile such as your level of health and lifestyle details such as smoking, but also wider considerations including inflation, the insurer’s own taxes/expenses and the level of financial reserves they need to build and maintain.
As a broad guide, however, bear in mind that the guaranteed payout usually makes whole of life insurance more expensive than term insurance, perhaps by four to ten times. For instance, the cost for a 30-year-old man (non-smoker) paying £5 per month for 20-year term insurance, might be £35 per month for a whole of life policy offering the same payout. For a smoker, the disparity between the two types of policy could be greater, as the insurer will likely perceive the insured’s health to be lower quality and thus more likely to require a payout due to premature death.
Invitation
Choosing the right type and amount of life insurance is an important part of financial planning. We often find that clients underestimate the amount of cover they should put in place, especially when a large estate or financial dependants (e.g. children) are involved. After all, your cover may be required for many decades and it can therefore be beneficial to seek professional financial advice to ensure you obtain the right policy for your needs at a fair cost. You should also review any existing life insurance from time to time, to ensure it is suitable for your needs. It would be tragic to put your loved ones in financial difficulty later due to taking out a policy which does not provide sufficient cover.
If you would like to discuss your financial plan and protection strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.