What is Whole of Life Insurance?

Full Definition

Whole of life insurance is a type of life insurance policy that guarantees to pay out a lump sum on the policyholder's death, whenever that happens, provided premiums continue to be paid, in contrast to term life insurance, which only pays out if the policyholder dies within a specific fixed term (for example 20 or 25 years) and pays nothing if they outlive the term. Because a whole of life policy is certain to pay out eventually -- the only uncertainty is when -- premiums are typically significantly higher than for a comparable term life policy covering the same sum assured, and some whole of life policies review premiums periodically and can increase them (or reduce the guaranteed sum assured) if the insurer's underlying cost assumptions change over the life of the policy, so buyers should check whether a specific policy is "guaranteed" (fixed premiums and cover for life) or "reviewable" before committing. Whole of life insurance is commonly used specifically for inheritance tax planning, since a policy can be written in an appropriate trust so the payout falls outside the policyholder's estate and is paid directly to beneficiaries, providing a lump sum that can be used to cover an expected Inheritance Tax bill without beneficiaries needing to sell an illiquid asset, such as the family home, to raise the funds. It is also sometimes used for simpler purposes such as covering funeral costs or leaving a guaranteed legacy, though because of its higher relative cost compared with term insurance, whole of life policies are generally recommended only where a genuine lifelong need for cover exists, rather than as a default choice for straightforward family income protection, which term life insurance usually covers more cost-effectively.

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