The Pros And Cons Of Whole Life Insurance

Whole Life Insurance

When it comes to buying life insurance, we’re usually faced with two options – whole or term life cover. Whole life insurance can be a great way to ensure your family is financially protected in the event of death. In this article, we’ll take a look at the pros and cons when it comes to buying this type of cover.

What is whole life insurance?

As you might have already guessed, whole life insurance covers you for your entire life once you take out a policy. When you die a lump sum is paid out to your loved ones by your insurance provider.

Whole life cover is often known to insurers as life assurance – as a pay-out is assured no matter when you happen to pass away. It’s usually more expensive than other policy types as it provides permanent cover, unlike cheaper options such as term life insurance.

Once you take out cover, you start paying premiums to your insurer. These payments are usually made on either a monthly or annual basis. If you fail to make premium payments, your insurer may end your cover.

What types of cover are available?

There are the main types of whole life cover:

  • Balanced (or standard) cover – the pay-out value and premium cost are fixed throughout the policy. Buying whilst you are young can help you lock in cheaper premium rates, saving you money in the long term.
  • Maximum cover – The policy is linked to an investment fund managed by your insurer. Each month they invest the money from your premiums to make a big enough return to cover the eventual pay-out.
  • Over 50s cover – Designed for those aged 50 and over who may have been denied coverage due to age or health. With this type, you are guaranteed to be accepted for cover, although there is usually a 12 month waiting period before a claim can be made.

Pros of whole life insurance

  • Your policy pays out regardless of when you pass away (as long as you continue paying premiums).
  • Whole life insurance provides permanent cover, so your loved ones are assured of a payout no matter when you die.
  • Premiums are fixed meaning that your cover will cost the same per month for as long as you have the policy.
  • Policies build cash value which you can borrow against before you die.

Cons of whole life insurance

  • Whole-life policies usually cost more than other types of cover.
  • Premiums for maximum cover may increase if the investments made by your insurer fail.
  • The pay-out value remains the same throughout your cover. Due to the effects of inflation, the eventual pay-out may be worth less than when you originally took out the cover.

Other types of life insurance

Perhaps whole life insurance isn’t the right cover for you? This could be due to your budget or what you’re looking to cover, in which case you may be better suited to a term life policy.

Term life insurance is generally cheaper than whole life, however, it only provides temporary cover. When you take out a policy you and your insurer agree on the length of your policy – known as the policy term. Your policy will only payout if you die within this timeframe.

Term life insurance has 3 types of cover:

  • Balanced – The pay-out amount and premium cost of your policy remain the same throughout your cover.
  • Increasing – The pay-out value increases over time to protect it from inflation. Your premiums may also increase alongside it.
  • Decreasing – Typically used to cover large payments (like a mortgage) that your family would struggle to pay back. The payout value decreases over time as you make repayments.

How much cover will I need?

The amount of cover you buy usually depends on your family’s current financial situation. Before you take out cover, you should assess how your death could impact your family’s finances.

 The pay-out from a whole life policy can be used to help your family with finances such as:

  • Everyday expenses
  • Funeral costs
  • Utility bills
  • Mortgage repayments
  • Outstanding debts or loans
  • Childcare support

You may not want to spare any expense when it comes to protecting your family, however, it’s always a wise choice. Over-insuring could cost you money that may not be needed and instead, could be spent in better places. With this in mind only cover what is necessary and save some money to enjoy the present!