Whole of Life Insurance Explained: Key Features and Policy Options

In this article, we look at whole of life policies. This article is particularly relevant to the CII R01, R05, R06 and AF5 exams.

This article is correct as at 25 March 2025.

Life Assurance

Life assurance can be divided into two main categories – ‘whole of life’ and ‘term’ assurance.  Whereas a term policy provides cover for a fixed period, e.g., 10, 20, or 30 years, and only pays out if the policyholder dies within that timeframe, a whole of life policy pays out on the death of the life assured whenever that occurs. 

Whole of Life

A whole of life policy remains in place for the policyholder’s entire lifetime, as long as premiums are paid. A payout is guaranteed whenever the policyholder dies, making it a common choice for inheritance tax planning, estate preservation, or providing a financial legacy.

Many whole of life policies also build up a cash value over time, known as the surrender value. This value grows gradually, meaning the amount available for early withdrawal is often very low in the initial years. If a policy does not accumulate a surrender value, it falls under ICOBS (Insurance Conduct of Business Sourcebook) rules rather than COBS (Conduct of Business Sourcebook) rules. 

Types of Whole of Life Assurance

Whole of life policies can be structured in different ways, depending on the policyholder’s needs and financial situation.

1 – Flexible Whole of Life Policies

Flexible policies allow policyholders to adjust the balance between life cover and investment as their circumstances change. These policies often include a choice of investment funds and may offer additional options such as critical illness cover.

Premiums can be structured in several ways:

• • Payable for life, ensuring continuous cover.
  • Ceasing at a specific age, after which cover continues without further payments.
  • Increasing over time to counteract inflation or adjust for specified life events without requiring additional medical underwriting.

When premiums are paid, they are used to purchase units in an investment fund. A portion of these units is then cancelled to cover the cost of life assurance, while the remainder stays invested, potentially growing in value.

There are three main types of flexible whole of life policies: 

Maximum Cover Plans

• • Initially offer low-cost premiums for a fixed term (e.g., 10 years).
  • Premiums are reviewed at regular intervals and typically increase significantly with age.
  • Policyholders must either accept the increased premium or reduce their level of cover.
  • If payments stop, the policy will gradually lose value and eventually lapse. 

Standard Cover Policies

• • Premiums are designed to remain level, assuming the underlying investment achieves a set growth target.
  • If this target is not met, the policyholder faces the same choices as a maximum cover plan – increased premiums or reduced cover. 

Guaranteed (Non-Profit) Whole of Life Policies

• • No investment element, meaning premiums and cover are fixed for life.
  • More expensive than standard policies but provides certainty in terms of cost and payout. 

2 – Over-50s Plans (Funeral Plans)

Over-50s life assurance plans are marketed as funeral expense policies, offering a low sum assured with low monthly premiums. These plans typically have simplified or no medical underwriting, making them accessible to older individuals who may struggle to obtain traditional life assurance.

However, they do not always provide good value for money, as:

• • The payout is often limited in the first couple of years—covering accidental death only initially.
  • If the policyholder passes away from other causes within the initial period, only a refund of premiums may be provided.
  • Long-term policyholders may pay more in premiums than the final payout amount.

3 – Assurance Bonds (Investment Bonds)

Assurance bonds, commonly referred to as investment bonds, are single-premium, non-qualifying whole of life policies. Unlike traditional whole of life policies, their primary purpose is investment, with a small life cover element – typically 101% of the bond’s value.

Various types of investment bonds exist, including:

• • Unit-linked bonds, which fluctuate in value based on investment performance.
  • With-profits bonds, offering smoother growth through annual and final bonuses.
  • Guaranteed income bonds, providing a fixed regular income.
  • Guaranteed growth bonds, designed for capital accumulation.

Choosing the Right Policy

The most suitable type of life assurance depends on an individual’s financial goals and protection needs:

• For temporary financial security (e.g., mortgage or family protection), term assurance is often the most cost-effective option.
• For estate planning or lifelong cover, a whole of life policy ensures a guaranteed payout, although it comes at a higher cost.
• For investment purposes, assurance bonds provide access to financial markets with a minor life cover component.

By understanding the key differences between term assurance and whole of life policies, individuals can select the right type of cover to suit their financial situation and long-term objectives.

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