Gloucestershire IFA: Independent financial services brokers based in Cheltenham offer lifetime financial planning and wealth management

What Is Whole Life Assurance?

For a given premium, a wide range of plans are available. The premium is split between providing for the insurance required now and investing into the insurance company funds in order to subsidise the cost of the cover in later years.

How the insurance benefits are paid for

A premium is charged based on the cost of providing cover on a year-by-year basis

Over the initial 10 year term, the cost of providing the cover in year one is a fraction of the cost in year 9. So in Year 1 90% of the premium may be invested into an investment fund with 10% paying for the protection. In year 9 the protection may cost 125% of the premium but the accrued savings subsidise the cost

If the underlying fund performs well the client may receive a cash sum on surrender or maturity

If the fund performs poorly, the premium will have to be increased at a later date

Minimum cover

Here the level of guaranteed insurance is relatively low and hence a large proportion of the premium will be invested hopefully building up a substantial fund for the investor or their dependants

Maximum cover

At the upper end of the scale, where the sum assured is high, a much smaller proportion of the premium is invested and after the initial guaranteed period (which is usually 10 years) it is nearly always necessary either to increase the premium significantly (typically by a factor of 3 to 6) in order to maintain the level of cover

Alternatively, the level of protection is dramatically reduced should the same premium be paid

Balanced cover

Between the above two extremes is a “balanced” level of cover where the ratio of sum assured to premium is designed at a given growth rate to be just sufficient to maintain the sum assured throughout life, however long that may be
Care needs to be taken when considering a balanced cover plan. There is no guarantee that the cover will be maintained for life as this depends upon the growth rate of the insured funds. For example, some plans appear cheap for balanced cover by assuming unrealistic growth rates

It is possible to pay a premium within a wide range, for a given sum assured

If cover throughout life is needed with some assurance of the level of the premium, then balanced cover would be chosen

If the highest sum assured is required for the lowest premium, maximum cover (minimum investment) would be chosen

If a low sum assured but a high savings element is needed, minimum cover (maximum investment) would be chosen

At the end of an initial period (between 7 and 10 years)

The insurance company will review the premium to sum assured ratio

Where maximum cover is selected, either the premium will increase significantly or the sum assured will reduce

Where balanced cover is selected the review will still take place, but only if the insurance company has failed to meet its target rate of growth will it be necessary to alter the premium or sum assured

Further reviews then take place, usually every 3-5 years. Flexible Whole Life Assurance plans usually have other features that may allow the sum assured and/or premium to be index linked, or otherwise increased in pre-determined stages

Plans can be written on a single life or joint lives, where the sum assured is payable on the first death (or diagnosis of a critical illness) or on the second (usually used for inheritance tax (IHT) planning).

As these plans have an element of savings, insurance companies can market them as a means to provide future funds (to repay a mortgage etc)

The charging structure of such plans, means that they may be poor value savings vehicles and they may be best used to provide cost effective protection against death or illness

Where a significant fund is established, it is possible to use this to pay future premiums, so a plan could be made “paid up” with all future premiums being paid from the accumulated fund until this runs out

When the insurance is no longer required, one simply ceases to pay the premium and a surrender value may then be payable

This article (What Is Whole Life Assurance?) is intended to provide a general appreciation of the topic and it is not advice. Guidance should be sought from a specialist who is qualified to advise in your specific circumstances.

For more information on this aspect of "life insurance - what you need to know", please contact Cheltenham Independent Financial Advisers Limited on 01242 269656 or email us at info@cheltenhamifa.co.uk. One of our advisers will be happy to assist you.