Term vs. Whole Life Insurance - Which is right for me?
Ian O'Dowd, Independent Financial Adviser talks us through the options available and differences between Term and Whole Life Insurance.
Personal protection can be a complicated subject. When considering this you may ask yourself questions like “How much cover do I need?” or “How long do I need the cover for?” or even “What type of policy do I need?”
To help along the way here is a quick guide to the main types of policies available to you. However, as always we recommend you seek advice from a professional to give you guidance as to what cover is most suitable for your needs.
I like to call this policy a “what if “policy. A term policy is a personal protection policy that covers you for a specified term or to a specified age. Therefore, the benefit will only be paid if you die within the term set out from the start of the policy.
What am I covered for?
Term assurance can provide more than just life cover. For example, you can also include critical illness cover and income protection within the policy, or take these benefits in their own right. Now this has been made even more flexible with Multi Benefit polices which can cover you for life cover, critical illness cover and also provide income protection all within one policy. Therefore, the answer is you can be covered for most occurrences, however, what cover you need really depends on your personal circumstances.
Do I need Life Cover?
This, of course, is again down to your individual needs. If you have dependents, life cover should be a serious consideration. You may want to consider the financial impact of your death on your family should you firstly, have a mortgage on your family home that your dependents could not maintain without your income and secondly, if your dependents have no other means of supplementing your income if you were to die. Whilst the emotional loss of a loved one can never be quantified in monetary terms, not having any financial strains can certainly help the bereavement process.
Do I need Critical Illness Cover?
A critical illness, such as certain types of cancer can be suddenly diagnosed and will usually result in you being off work for a long period of time. Other conditions such as a heart attack or stroke can also be covered under this type of policy. Therefore, as with life cover, if you have financial commitments and your dependents would suffer financially from the loss of your income if you are not able to work due to a critical illness, you should consider critical illness cover.
There are of course considerations to the level of cover you need which will be influenced by factors such as, your sickness pay arrangements with your employer, the level of your financial commitments, and how long you would like to supplement your income for. You do need to keep in mind that this cover is more expensive than life cover on its own. The reason being is because you are more likely within the term of the policy to be diagnosed with a critical illness than you are to die. Therefore, whilst most people would like to cover all eventualities, there is of course the element of cost that will influence your decisions.
Do I need Income Protection?
Income Protection is designed to supplement your income if you are not able to work due to an accident or sickness. If a claim is made, the policy will cover a percentage of your income, usually a maximum of 60% for the time that you are not able to work. Keep in mind there are many variations that you can take on this policy. The first being the deferral period which refers to the length of time you need to be off work before you can make a claim. This can range from 4 weeks to as much as 52 weeks. This is useful if you have a period that you will receive sickness pay from your work. The next caveat being the level to which you are covered. This will come down to an assessment of your personal financial circumstances.
You should consider this type of cover if you or your dependents would suffer financially from the loss of your income if you are not able to work due to an accident or sickness.
Whole of Life
I like to call this policy a “when” policy. A Whole of Life policy will pay the benefit specified on the plan when you die, not if you die. Naturally, this benefit comes at a higher cost than a term policy as the plan will definitely pay the sum assured at some point where as a term policy will only pay the benefit if you die within the specified term.
What am I covered for?
In terms of the benefits available to you on a Whole of Life policy, you can only have life cover on this policy. There is no option to take critical illness cover or income protection. As you can appreciate, the risk to an insurer is too high to cover a person for these benefits for the whole of their life and therefore, it is not offered.
Do I need a Whole of Life Policy?
This depends. Do you want to leave a legacy for your loved ones for things such as funeral costs? If so, a Whole of Life plan is a good way to achieve this.
Also, is your estate likely to incur an Inheritance Tax Charge upon your death? Putting a Whole of Life plan in place can help mitigate this. If it is important to you that your estate is left in its entirety without tax implications to your selected beneficiaries a Whole of Life policy can be put in place for the likely amount of the Inheritance Tax bill upon your death. Furthermore, this policy can be placed into trust for your beneficiaries, which firstly means that the proceeds of the life policy will not form part of your estate for Inheritance Tax purposes and secondly, ensure the benefit from the policy gets to the right people at the right time.
What other options are available to me?
Well, with Term and Whole of Life plans you can incorporate other benefits into the plan. An example would be indexation of the benefit which would be useful to cover an increasing liability or an increasing Inheritance Tax liability. Another example would be the option to protect your premiums if you are not able to work due to accident or sickness. This is called Waiver of Premium. It is beyond the scope of this text to go through all of the benefits available within personal protection policies, however, rest assured this is something your Financial Adviser can help you with.
So, back to the original question. Term or Whole of Life? If you would like to cover a specific need such as a mortgage or supplementing income for your dependents for a specific period of time, which may be the term of your mortgage, or until your retirement, then a Term policy is likely to be more suitable for you. However, if you would like to leave a legacy to your beneficiaries when you die or have an Inheritance Tax liability that you would like to mitigate, then a Whole of Life policy is likely to be more suitable.
Whilst of course you are able to take personal protection directly through providers, I would always recommend you seek advice from a Financial Adviser to discuss your protection needs. They will complete a comprehensive assessment of you circumstances. Because of this you can be sure that your personal protection will be the right policy for your needs, with the right amount of cover, for the right amount of time with the most suitable benefits included.
Please feel free to contact our Financial Advisers on 0800 038 9733 to arrange a complimentary consultation. Alternatively for further information, please visit our webpages on Income Protection and Life Assurance & Critical Illness Cover.
This Blog was written by: Ian O'Dowd, Independent Financial Adviser