Whole of Life insurance - When do you need this?
Unless they are extremely wealthy most people need life insurance to cover expenses, if you die then expenses such as mortgages or school fees still need to be paid. These expenses, coupled with a loss of one income, perhaps the only income, can cause financial hardship for your remaining family.
Life insurance is to bridge the gap between the amount of assets you own currently and the amount of liabilities you expect to have in the future. Therefore, the longer you are working, the more assets you accumulate, so the less life insurance you need. In this situation, term insurance works well.
However there are some very good reasons why some people may want whole of life insurance instead of the term insurance alternative:
1. Inheritance tax planning – If you are from or live in a country which has inheritance or estate taxes, you can use insurance to pay the tax due on your estate after you die. For example, UK domiciles have a 40% tax liability on their estate over £325,000. If you take out insurance to cover the potential 40% liability and have a trust wrapped around the policy, your beneficiaries can use this money to pay your inheritance tax bill.
2. Leave a legacy – Some people would like to leave a definite amount of money to their children or family. With whole of life insurance, you know for sure that no matter when you die, your family or children will have this money. Some families like to use this to pass wealth between generations.
3. Investment and Insurance – Whole of life insurance has two elements to it. There is an investment and insurance element. Part of your premium pays for the cost of insuring you and the rest of the money is invested so there is potential growth on these funds. The invested amount accumulates into a cash value, so that if you surrender the life insurance in the future, you will get a cash amount in return.
4. Flexibility – With whole of life insurance you can keep the plan for as long as you like, increase or decrease the life assurance amount (additional underwriting will may be needed if you increase the life insurance amount) and if you surrender the policy, you can get something back for the premiums which you have paid.