Types of whole of life assurance
Product types available are: with profits whole of life; unit linked whole of life; low cost whole of life; universal whole of life and non-profit whole of life.
With-profits whole of life assurance.
This type of policy guarantees to pay the sum assured on the death of the life assured at any time.
The policyholder pays an extra premium to allow participation in the with profits fund, which works on a traditional with profits basis, in that the sum assured is increased annually by the addition of a bonus – called a reversionary bonus.
Once added the bonuses permanently increase the basic guaranteed sum assured payable on death.
A further final (or ‘terminal’) bonus will usually be paid on death, although this is not guaranteed, which can increase the size of the payout substantially, especially if a high level of (annual) reversionary bonus has already accumulated.
The surrender value is unlikely to be substantial in the early years of the policy and for the first two years at least it is likely to be nil.
Unit linked whole of life assurance.
With this type of policy the ‘mix’ between life cover and investment is decided at the outset. Each monthly premium is used to buy units in a selected fund at an offer price.
Then every month the insurer calculates the cost of the life assurance for the next month only and deducts this charge by ‘cancelling’ just enough of the policyholder’s accumulated units to pay for the cover.
In this way, the policy grows in value as the number of units held in the policy accumulate and (hopefully) the value of each unit also increases.
The investment growth will depend on fund performance, how much is being deducted to pay for the life cover, and any other optional benefits selected (e.g. critical illness cover).
Initial charges are made to recoup the set-up cost of this type of policy. This is either done by a low allocation to investment units or special initial units are created.
The premium is usually reviewed on the 10th anniversary and may need to increase at that point (or the sum assured to reduce) depending on the level of unit growth.
Universal whole of life assurance.
This type of policy is a unit linked whole of life plan with further options. As well as cancelling units to buy life cover they can be cancelled to buy:
-permanent health insurance;
-critical illness insurance;
-personal accident benefits;
-hospital income benefits.
The aim of the policy is to cover all the policyholder’s protection needs in one policy with the flexibility to move from protection to investment to suit changing needs.