Whole of life insurance in the UK explained

Whole of life insurance is a type of life insurance policy that’s guaranteed to pay out whenever you die, as long as you keep paying your premiums. So, it offers cover for the whole of your life. It’s also known as life assurance because the payout is ‘assured’.

Unlike term insurance it doesn’t have an end date. So, once the plan is set up and your premiums are up to date, it will pay out when you die. People take out this type of life insurance so they can leave a legacy for their family, cover funeral costs or pay an inheritance tax bill.

In this guide we look at how a whole of life policy works and how it compares to term life insurance. We review the benefits of this type of insurance and how much it costs.

What is the difference between whole of life insurance and term life insurance?

Whole of life insurance differs from term life insurance because it doesn’t have a fixed end date.

Term life insurance pays out a one-off lump sum if you become terminally ill or die during the policy’s term. You decide how long you need the policy to last – anything from five to 70 years. After the term life insurance policy ends, your loved ones won’t receive a payout when you die.

The table below explains the differences between the two policies.

Learn more: Term life insurance explained

What are the benefits of whole of life insurance?

Financial security

One of the main reasons to take out any life insurance policy is to protect your family’s finances.

With a whole of life policy, you’re protecting your family right up until the day you die. Whenever that may be. So, the lump sum they receive could be used to pay for bills, everyday living, school fees or even funeral expenses. Knowing that your family is guaranteed to receive this money is very reassuring.

Take James for example. He wanted to cover the costs of his grandchild attending a local private school. He was aware that this was a long term commitment. He wanted to make sure the fees and any future education expenses would be covered even if he was no longer here. So, he took out a whole of life plan which paid out on his death and supported his grandchild through school and university.

Leave a legacy

As we get older, we may need to start paying for support around the home which eats into our savings. And in some cases, if we need to move into a care home, our savings can disappear altogether.

Taking out a whole of life policy means that you're guaranteed to leave behind some money for your loved ones. They can then use the money how they wish, but it could be used to pay for your funeral, for example.

Tax benefits and estate planning

Any payments to your loved ones from your whole of life insurance will not be taxed for income or capital gains. However, unless the policy is in trust, it will become part of your estate and may be liable for inheritance tax (IHT) at 40%. So, if the payout is supposed to be £100,000 but your estate is subject to inheritance tax, your beneficiaries may only receive £60,000.

If you think you’ll need to pay inheritance tax on your estate when you die, you can take out a whole of life insurance policy in trust to cover the tax bill. The policy sits outside of your estate, so is not subject to probate and can be paid quickly.

Taking growth equity

Many whole of life insurance policies also let you invest part of the money from your premium. That means it could become a form of equity if the cash value grows. If you wish, you can withdraw some of this cash tax-free. This won’t affect the payout sum as the investment element of most policies is an added benefit to the policy.

Can you have more than one life insurance policy?

The short answer is yes. In the UK, you can take out as many life insurance policies as you like. And with as many different insurance companies as you like.

There are several situations when you might consider taking out an additional policy. Such as:

• You feel you don’t have enough cover. For example, you may have cover for your repayment mortgage but not to provide a financial safety net for your family.
• You take on more financial commitments. Whilst a regular income is coming in, you can cover all the expenses. But if you died, the money from the extra insurance policy can help your loved ones pay everyday bills without worrying.
• You want guaranteed cover. You want to make sure that you leave some money to your loved ones whenever you die. So, you take out a whole of life policy in addition to your existing term policy.
• You have an inheritance tax bill to pay. If you take out a whole of life plan in trust, it can be used to pay any inheritance tax.

Learn more: Multiple life insurance policies explained

Does whole of life insurance expire?

No, it doesn’t. Whole of life insurance policies last until you die. They are permanent and don’t have an expiry date. This means you don’t have to worry about buying a new policy or extending your existing one as there’s no end date.

Are whole of life insurance policies taxable?

A whole of life policy is not subject to capital gains tax or income tax. But, if your estate is worth over £325,000, you may have to pay inheritance tax. This is charged at 40% for any assets over this amount.

If you put your whole of life policy into a trust, the payout doesn’t form part of your estate, so won’t be counted. This means you won't need to pay inheritance tax (IHT) on your whole of life policy. This can make a big difference when calculating your estate.

For example. Michael’s estate is valued at £300,000. He also has a whole of life policy of £80,000. His policy is not in trust. When he dies, the payout forms part of his estate which takes him over the inheritance tax threshold. He ends up paying £22,000 in IHT. If he had put the policy in trust, he would have stayed under the IHT threshold and paid no inheritance tax.