By the latter stage of life many people understand the importance of having life insurance for the purpose of covering rising funeral costs or leaving an inheritance; but what many people of this generation don’t know is that there’s more than just one option available.
You know you need life insurance, but do you know what type?
Nowadays the market is saturated with plans targeted towards specific age groups, the most common of which being an Over 50s plan. Some life insurance companies even specialise specifically in these types of policies.
However, these plans have a not so widely recognised sister policy – Whole of Life insurance.
Paying premiums for the rest of your life and ensuring a guaranteed pay out to your loved ones, it can be difficult to see what the difference is between these two policies but let me tell you, it’s more significant than you would think and there’s a time and a place for each!
As a side note, there’s also a third option – The funeral plan. This is a policy which offers a pay out to purely cover the cost of your funeral. As this post predominately focuses on policies which allow freedom when it comes to the purpose of the pay out, we’ll not be discussing this option in detail.
So let’s compare the differences. There are three main areas where Over 50s and Whole of Life policies types differ – the application process, the cost of monthly premiums and the total lump sum pay out.
The Application Process
Whole of Life insurance follows an almost identical application process to that of term-based life insurance policies, taking into account your age and medical well-being, whereas an Over 50s plan doesn’t.
Most Over 50s plans offer a guaranteed acceptance within a specific age range, usually between 50 and 85 years. They also do not require you to undergo a medical exam, or even provide any information on their current state of health. This makes these policies ideal for anyone within the specified age range who may not have a clean bill of health.
Whole of Life policies on the other hand are based on a number of factors including your age and medical history. This means that the younger the policyholder is, the lower their monthly premium is likely to be; equally, the better their health, the more they’ll benefit from reduced premium costs.
Regardless of your health and age, it’s also important to note that the application process for Whole of Life insurance cover can be lengthier than that of an Over 50s plan, purely due to the need for additional information. So dependent on your schedule and patience, the deciding factor may be the shorter, simpler application process of an Over 50s plan.
Regardless of policy type, smokers usually pay more.
The key difference here between an Over 50s and a Whole of Life plan is that if you’re a smoker, you’ll still be guaranteed acceptance, whereas dependant on other factors, smoking may cause you to be declined for Whole of Life cover.
Due to the absence of a medical exam with regards to an Over 50s plan, it can be tempting not to disclose the fact that you smoke. However, if upon your death its discovered you smoke and this hasn’t been disclosed during the application process, a pay out can be denied by the insurer due to non-disclosure.
Generally speaking, Over 50’s plans cost more on a monthly basis than Whole of Life cover.
Overall the cost of your monthly premium will be influenced by the level of cover you wish to obtain; but, due to the lack of medical information required for an Over 50s policy, an insurer will charge more on a monthly basis to account for unknown risks.
A Whole of Life policy on the other hand will cost less for the same level of cover as the insurer can make better judgement on the level of risk they’re taking.
For example, one policyholder may be 62 and in good health, whereas another who is also 62 may have suffered a heart attack. With regards to the application process for an Over 50s plan, the applicants would appear the same and therefore, be charged at a higher premium to account for the possibility of poor health.
In the same scenario but with regards to Whole of Life insurance, however, the first applicant would be charged significantly reduced monthly premiums due to a clean bill of health whereas the second, if accepted at all, would receive a monthly premium which mirrored the high level of risk they presented to the insurer.
But the increased premiums don’t necessarily last forever
Whilst the Over 50s premiums may be more on a monthly basis initially, certain policies only require you to pay premiums until a specific age, usually 90. Whereas Whole of Life insurance normally requires you to make payments until the day you die.
As a result, whilst on a monthly basis an Over 50s plan may be more expensive, dependant on how long you live, it could end up being a more cost-effective solution.
For example, at the age of 70 Jenna takes out an Over 50s plan at £15 per month and Thomas takes out a Whole of Life policy which costs £10 per month. If they both lived to 105 but Jenna was able to stop paying her premiums at the age of 90, in total Jenna would have paid a total of £3,600 whereas Thomas, who had to pay until he died would have paid a total of £4,200.
The Pay Out
Whole of Life insurance, on average, pays out 40% more than an equivalent Over 50% plan
With both policy types a cash lump sum pay out is guaranteed to your beneficiaries upon your death, provided you continue to make your monthly payments. However, Which? found that this lump sum was on average 40% higher when the policy was Whole of Life as opposed to an Over 50s plan when the same monthly premium was paid. This is to mitigate the cost of the risk to the insurer as previously mentioned.
Written in Trust
Avoid 40% inheritance tax and lengthy probate by writing your policy in trust.
Finally, it’s worth noting that both types of policy can be written in trust. This not only allows you to have more control over who receives the pay out but also means that the sum doesn’t form part of your estate. This means inheritance tax (current threshold £325,000) on your estate is reduced and a lengthy probate period, before the pay out is received, is avoided.
And the winner is – You decide!
That’s right – the type of policy you should take out is completely dependent on your needs and your budget.
So if you’re closer to the lower end of the age range and have a clean bill of health, it may be in the interest of your purse strings to opt for a Whole of Life policy due to the lower monthly premiums. But if you’re older, or suffer medically, an Over 50s plan may be the right choice for you as no medical information is required.
(Article source: 50 Plus)