How whole of life insurance works and how to make it cheaper than it should be.
The main thing in common between whole of life insurance and term insurance, or term assurance, is that both policies pay out to the holder on death for the length of the policy. The big difference is with the meaning of term. For whole of life the policy is valid for the whole time of the insured person’s life whereas with term insurance the policy is only valid for a specific period of time.
Owing to this fact term insurance, especially short term term insurance can be significantly cheaper. This is due mainly to the fact that it will only run for a specified period and there is a chance that the life assured will not die during this period. However due to the fact that whole of life insurance will run for the whole of the life of the client there is somewhat of a guarantee that it will definitely pay out some day and for that reason it is more expensive.
Another reason whole life insurance can be dearer is the fact that a lot of plans, though not all, do build up an investment element and again this is not without cost. Now at this point it is worth pointing out that whole of life insurance is not a very effective savings plan so if you are ever looking for a good investment whole of life insurance is probably not the right product for you.
The main reason that this type of insurance builds up an investment element is so that it can always meet the ever changing cost of the life assureds risk of dying. When you take out a life insurance contract the life insurance company has to work out the chance of you dyeing and then cost the plan accordingly. With whole of life contracts this costing exercise can be very difficult as the life company does not know what is going to happen in the distant future, with that in mind if they can build in a buffer zone by way of an investment element it should assist them with the changing costs of covering you well into the future.
Now this is all understood I can now get into the important bit of telling you how you can make it cheaper. Again with a lot of whole life contracts there are three levels on which you can quote the plan based on premiums and another three based on benefit. They are essentially the same but owing to the fact that some people want a specific premium level and some people want a specific sum assured they have set the plans up in this way.
The maximum benefit premium based plan is designed to give the best sum assured for a given premium. What we get is the highest life cover for the lowest cost. It should be noted however that this is based on a 10 year timescale after which it is reassessed with either the premium increasing or the end yield decreasing. As with all good things the high end yield means that some other part of the policy will be affected, in this case the investment element, so there would be a negligible fund value.
The second type of plan is standard cover, which aims to give a quote that can be sustained for the life of the policy. This is probably the best option when looking for whole of life insurance because of the way it is calculated. What happens is that the insurance company assesses the cost of the policy over the duration of your life and bases the premium on those figures.
Finally there is minimum sum assured, this will without fail be the most expensive way of providing cover as it is aimed predominately at providing an investment element within the plan and pays little contribution towards the life insurance element. If this is the type of plan that you are looking for then you should definitely speak to an independent financial advisor as there are always more effective ways of investing money than doing a whole of life insurance contract in this way.
You should be aware the sum assured based quotes work in a similar way with a maximum cover for minimum premium. Standard cover for standard premium and minimum cover for a higher premium. All that said, with any type of life insurance quote whether it is level term insurance or indeed whole of life assurance then it is always advisable to seek independent financial advice to make sure that the plan is the most suitable for your needs especially when this choice will take you many years into the future.
In conclusion, then, by opting for either maximum cover or minimum premium when going for whole of life insurance, there are definitely savings to be made. But you should keep in mind that the true cost will need to be met at some time during the span of your whole of life insurance policy. That said this is still a good way of at least getting some form of life insurance cover at a rate that is affordable to you now. It will at least give you some form of reassurance and comfort for what will lie ahead in your future.
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