What is Whole Life Assurance? By Gemma Stanbury At Isnare.com Ezine Articles

Where term life assurance offers financial protection against the policy holder’s life only for the duration of the insurance term, whole life assurance guarantees the payment of an assured sum on the death of the policy holder, whenever that might happen.

From that simple definition, therefore, it should be possible to see that whole life premiums are going to cost more than term premiums, since the event is definitely going to happen and the insurer will ultimately need to pay out. The insurer’s risk, here, is not "if" but "when". Nevertheless, some policies have a specified age beyond which cover continues but without the need to pay further premiums.

More important than this distinction, however, is that unlike a term life assurance policy, whole life assurance does not guarantee the whole of the assured sum. The benefits payable on the death of the insured are instead determined by the investment performance of the fund into which the premiums have been paid. In practice, the monthly premiums will have been used by the insurer to purchase units in an investment fund. Some of the units are then cashed to provide a minimum level of guaranteed life cover. Just what proportion of the premium is used for investment and what proportion for life cover will to a certain extent depend on the options agreed between the insured and the insurer.

For example, the insured might opt to receive the minimum amount of guaranteed life cover and see more of his monthly premiums going towards the purchase of investment units. At the other end of the scale, the policy holder might elect the maximum proportion of life cover and, so, there would be a much smaller proportion available for investment.

Typically, every five or ten years, the policy will have in-built review dates, when the insurer will compare the actual value of the investment fund, its likely future performance, and the benefits expected upon termination of the policy. Such reviews can result in the insurer advising that premiums will need to be increased if the level of cover is to be maintained, or for the level of benefits payable upon the policy holder’s death to be reduced if it is preferable that premiums are to remain at the same rate.

A further variation on the whole life policy is a with-profits scheme that guarantees a certain payable benefit on the policy holder’s death but also increases that benefit year on year with the addition of annual or "reversionary" bonuses. These will then permanently enhance the amount of the sum eventually paid out. Upon the policy holder’s death, most with-profits policies will also incorporate a so-called terminal bonus, in addition to the accumulated annual bonuses, thus further enhancing the total benefits paid.

As with other forms of life insurance, whole life assurance also generally offers a number of additional options which are available on payment of a further premium. These might include payment of a lump sum benefit to the policy holder in the event of his or her becoming disabled or being diagnosed with a serious or critical illness.

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