What is whole of life insurance?

Whole of life insurance or whole of life 'assurance' is a long-term insurance policy designed to pay out a cash lump sum on death of the policy holder, whenever that occurs. Whole of life policies provide a substantial level of life cover, but some do have an element of investment. The balance between life cover and investment will depend on the policy type and options selected.

How does whole of life insurance work?

Whole of life policies mainly have two elements:

  • one part of your money is used to buy life assurance
  • the other part of your money is invested, with the pay-out for this part depending on how the investment performs over the years.

You can usually pay a monthly or annual premium. Insurance providers may review this from time to time and revise the amount you have to pay. When you die, your beneficiaries (the individual(s) you've nominated on the policy) will get a lump sum payment. You'll remain covered as long as you pay the premium.

There are some whole of life policies that let you pay for a fixed number of year or to a set age, for example to age 90. You will still be covered until you die, but you won't have to pay anything after the fixed period has ended.

What are the different types of whole of life insurance?

The three main types of whole of life insurance are:

  • Non-profit - this policy guarantees to pay a fixed amount of life cover on the death of the life assured, whether this occurs one day after the policy was completed or 30 years later. The benefit under this policy will never increase and is fixed and guaranteed.
  • With-profit - this policy guarantees to pay a minimum level of amount of life cover on the death of the life assured. This amount increases annually through the addition of annual (or reversionary) bonuses. These bonuses are not guaranteed to be declared every year, but once added, they cannot be taken away. The level of bonus applied will be determined by the financial performance of the life company providing the policy.
  • Unit-linked - offer a mixture of life cover and investment, depending on the investor's changing needs. The premiums buy units in the fund of the investor's choice. This may be a fund run by the life office itself, or it might be an investment fund run by another institution. The value of the policy, therefore, depends on the performance of the underlying fund or funds.

Is a whole of life insurance policy right for me?

A whole of life insurance policy could be right for you if:

  • You want to leave your family a lump sum when you die
  • You understand that, if you opt for an investment-linked policy, the pay out will depend on how it performs
  • You want a pay-out that could help cover inheritance tax if your estate is valued at more than £325,000

If you are considering taking out a whole of life policy, it is a good idea to speak to an expert to check it is the right policy for you.

Can I cash in my whole of life insurance policy early?

Some policies let you cash-in early and receive a smaller pay-out before you die. However, there can be high charges and a penalty and you might receive less than you've invested.