Whole of life (WOL) cover is an insurance policy that pays out on death. It runs for the whole of someone’s life and pays out a lump sum when they die, not if they die within a defined term.
The two main types of WOL cover are fully underwritten and guaranteed acceptance policies. Underwritten policies are priced depending on age, health, lifestyle and someone’s medical history, while guaranteed acceptance policies can base premiums on age and smoking status but do not take a person’s medical history into account.
WOL cover is a valuable policy, which in its underwritten form is most often used for mitigating inheritance tax bills, as well as leaving money behind for loved ones or covering funeral costs. Sales of WOL cover fall far behind that of term assurance, but are on the up, with underwritten policy sales up 6.9% a year to 32,937 in 2015, and guaranteed acceptance (non-underwritten) sales up 7.4% to £261,137 in 2015. The need for cover As people grow older and their mortgage is generally paid off, and children are no longer likely to be financially dependent, many believe the need for policies such as life insurance fades. However, regardless of someone’s financial commitments, significant costs can be left for the family when a parent or spouse passes away. The average cost of a funeral in the UK is around £3,700, although costs can vary wildly, with the average being almost double this in London.[2] Families can also find themselves facing an inheritance tax (IHT) bill if the estate (including any property) is valued at more than the current threshold of £325,000. Anything over this amount is taxed at 40%, meaning many could be forced to sell the family home to meet the tax bill. While the IHT allowance will begin to increase from 2017, it will still capture many families unaware, who have benefitted from huge increases in property value over recent decades. IHT is not charged when passing an estate onto a spouse or civil partner, but is payable by children. IHT can be mitigated by gifting assets before dying, although this must be done more than seven years before to sit outside of the estate for IHT purposes. There are also rules that apply, particularly to gifting a property and continuing to live in it. So a whole of life plan placed in trust for the beneficiaries can be an efficient way of meeting an expected inheritance tax bill. What support is available from the state? Any state support is only paid to spouses, and the amount received depends on the national insurance history of the deceased, and how old they were when they passed away. A one-off lump sum Bereavement Payment of up to £2,000 can be claimed if the deceased was under state pension age, or over state pension age and not entitled to claim the state pension. If there are still dependent children within the family then a spouse could instead claim Widower’s Allowance, paying a maximum of £112.55 a week until the youngest child is no longer eligible for child benefit. If the deceased was between age 45 and state pension age, a Bereavement Allowance could be claimed. The payment is made for up to 52 weeks and depends on the age of the deceased, ranging from a maximum of £33.77 a week at age 45, to £112.55 a week aged between 55 and state pension age.[3] In comparison to the possible costs facing a family upon bereavement, it is clear that it is wise for people to make arrangements to ensure their family’s financial future. Speaking to clients about whole of life cover Talking about what will happen financially if someone were to pass away can be a conversation people don’t like to face, but it is essential within the financial planning process. When recommending WOL plans to clients it is worth being aware of how long premiums are payable for. Some are payable for life, while some stop at a pre-agreed age but cover remains in place for the rest of the person’s life. For fully underwritten plans, the sum assured and premium can be fixed for the life of the plan, or if the sum assured should rise in line with inflation, premiums usually increase yearly, based on the age of the policyholder. It is essential at outset to ensure clients understand that premiums can increase throughout the life of the policy if they choose this option. With guaranteed acceptance policies, these are generally only worth exploring for those in poor health, as people pay the same premium regardless of their medical situation. To find out more Speak to your Business Consultant or visit vitalitylife.co.uk/adviserWOL Sources:
