Whole of Life

 As the term suggests the plan is designed to pay out an agreed sum assured should the policy holder(s) die before an agreed target age. 

These plans are called ‘Whole of Life’ although the insurance company make a  target age, normally 85 -100. In the majority of cases this age is acceptable as the plans are written either:-

 a)     On a single life, perhaps to protect a loan or share agreement.

b)     On a joint life first death basis when the objective may be to protect the family unit against the premature death of the Father or Mother

c)     The third type of ‘Whole of Life’ is written on the basis of joint life second death; these plans are normally written for Inheritance Tax planning. This is the type of plan that we are dealing with here. 

Whereas all ‘Whole of Life’ plans work the same way it is with this third type that there can be a problem with the age to which the plan is written. It is obvious that a joint life last death plan must last longer than a single or first death plan. This is particularly important if the plan is written to protect an estate against tax liabilities thus if the plan does not pay out the sum assured at the time of second death the point of writing it in the first place is lost.  

The plans are written at outset for a premium, which is governed by the normal factors age, sex, health, life habits and the sum to be put on risk. The policy will have a target age depending on which company is chosen. 

Insurance companies take one of three ways to quote ‘Whole of Life’ these being:- 

1. “Whole Life” being targeted to a certain age this normally being between 85 and 100. The policy is designed to cover the sum assured until this age but unless the underlying fund performance is exceptional the policy would cease at this age with little or no value.
   

2. The plan is again written to a certain age this normally being between 85 and 109 but it is designed to produce a fund value equal to the sum assured provided the underlying funds perform at the quoted rate. Even in the event that fund performance is less than anticipated the fund would be likely to have a substantial value that would allow the plan to continue for some years after the target age. One advantage of this method of calculation is that because there is a considerable fund value available, should personal circumstances or IHT rules change the client would be able to encash the plan and use it for other purposes.
   

3. The policy is in fact whole of life and is guaranteed to pay the sum assured on death no matter how old the client is. These polices have no investment value at anytime, they are in fact similar to term assurance but with no end of term excepting death. These policies are very expensive and are normally only suitable for much older lives where the cost of cover is not a prime consideration.

In the cases of 1&2 above it is useful to look at the funding of the policy a little more closely.

Each year the premiums are used to purchase investments, normally unit linked which build up a fund. Each year the charges for life cover expenses are deducted from the fund.  

The cost of the life cover each year will rise as the ages of the client(s) increase, however the fund value of the plan will normally increase each year with the addition of new premiums and growth of existing units. 

As the policy will pay out either the sum assured or the fund value on death (whichever is the higher) the actual sum at risk will reduce as the fund value increases. However as the client(s) ages increase the amount taken each year per pound of cover will also increase. 

Any quote must make certain assumptions as to fund performance and it is clear to see that if the fund performs at less than quoted in the company illustration the fund value will not reach the target. Conversely if the funds perform better the sum assured could be maintained after the target age or in the case of a funded policy the cash value equal to the sum assured would be reached at a lower age.   

Most ‘Whole Life’ policies allow an increase in the sum assured each year this is normally linked to the retail price index or 10% whichever is lower.

This can be useful as the exposure to Inheritance Tax is likely to rise each year both as a clients wealth increases, the lower limit for Inheritance tax has stayed broadly in line with inflation over the last 15 years. These increases do not require any further medical evidence. The policy also has policy reviews, which will allow us to see how the policy is performing against expectations. These policy reviews are also very useful as they would allow the clients(s) the peace of mind that their policy is on track to provide the cover needed or the opportunity to increase the premiums if fund performance is not up to expectation. 

Should circumstances change in the future or indeed tax legislation reduce liability you would also have the option of taking the value of the plan or part of the value.

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