Whole of life or term insurance?
Term insurance is often the default cover for clients but when would whole of life cover be better? The UK’s shifting demographics, market competition, lower premiums, product innovation and optional add-ons are making for an interesting debate, writes Stephanie Spicer
A term plan has often been touted as a best first buy or an ‘if you buy nothing else buy this’ product because it is cheap compared to other protection policies and relatively simple.
There is a lot to be said for some protection being better than nothing, but when the same reasoning is used for selecting term over whole of life (WOL) there is a risk that best advice could be ignored.
A total of 333,785 WOL policies were sold during 2015, according to the association of British Insurers – a quarter of the 1,314,044 term policies sold. It offers no explanation as to the disparity, but the figures suggest it is important that advisers ensure the choices their clients make are the right ones.
Peter Chadborn, co-director of Colchester-based Plan Money, says: “Both have a part to play. It’s down to the adviser to identify when WOL should be used as opposed to defaulting to term.”
Put simply, term assurance is often seen as the usual solution for clients who want to ensure their debts are repaid upon death and WOL for those in need of inheritance tax planning and where appropriate, to cover funeral expenses.
However, increasing longevity is an important factor in the debate. With some people carrying debt into their retirement and a growing number facing the unexpected need to meet later life care costs, there will be times when term is not the most suitable solution, which is driving an increase in WOL products coming to market.
Great fluidity in clients’ retirement dates also acts as a catalyst for the balance tipping towards WOL products.
“Life cover is often recommended to run until retirement on the basis that by then one’s wealth has been created, debt should have been repaid and there is no longer an earned income that needs replacing in the event of death,” says Chadborn.
“Years ago it was easier to predict our retirement ages primarily because many people had final salary pension schemes that kicked in at a predetermined age; nowadays, our retirement is more fluid because it’s determined by the age at which we have amassed a big enough pot of money to afford to retire. This is far less certain, making it harder to predict when we will no longer need life cover.”
Premiums coming down
Traditionally, WOL cover was investment-based. If the investment element underperformed, the premiums had to go up – much to the frustration of advisers and their clients.
Today, not only has the nature of the product changed, with guaranteed premiums throughout the term of the plan but so has the typical client. People are not only living longer, but are in ruder health – lowering the cost of this type of protection policy.
Richard Sadler, head of Retail Protection Propositions at Zurich, says: “The fact we are living longer is good news for life insurance; it means that pricing is getting cheaper, making insurance more affordable.”
Healthier lifestyles make a standard underwritten WOL policy a viable option even for the older generation, according to Lifesearch, the Leeds- based adviser specialising in life and critical illness cover.
Emma Thomson, Life Office Relationship director for the firm, says: “Many people well into their 50s, 60s and even 70s are leading healthy lives and would, therefore, be able to take out standard underwritten life cover at a much cheaper price than an over 50s policy. “Plus, they’d have the benefit of not having the initial 12 or 24 month moratorium period – a usual feature of an over 50s guaranteed acceptance contract, which prevents early claims being made where the cause of death is not accidental.”
Chadborn points to more providers “making a play” in the WOL space. Growing competition in the market is also helping to lower premiums, while product innovation is affording greater choice.
Michael Ward, managing director of insurance comparison site PayingTooMuch.com, says: “The product hasn’t had the focus that term insurance has and there is, therefore, more margin to undercut existing players.”
Products on the market include those that offer discounted premiums, fixed rates, links with interest rates and links with age and lifestyle.
However, an increase in people taking out life cover at older ages presents some challenges for underwriters, too.
“It becomes more likely that individuals may have developed some underlying health conditions that need to be considered in making the underwriting decision,” says Sadler.
Adding long-term care cover
Underwriters are having to give greater consideration to debilitating conditions, such as dementia and alzheimer’s disease, than would have been the case a decade or two ago. As a result, some WOL products offer add-on options for long-term care cover.
“We may well see refinements to products,” adds Sadler. “One option that Zurich is piloting is the addition of a later life care option on its whole life plan.
“In essence, this allows someone who meets defined claims criteria (based on physical tasks or mental capacity) to choose whether or not to take a discounted sum assured early to meet care needs. There is no extra premium for this, and the discounted sum would be 70% of the full sum assured.”
Utilising more then one type of cover
Of course, the right type of cover for a client might not be a case of either term or WOL. Tom Conner, a director of London and Brighton-based Drewberry Insurance, warns against putting clients’ life cover needs into a single basket.
“It is perfectly reasonable to have both term and WOL at the same time as they tend to cover different risks,” he says.
“If all of the cover was lumped into the WOL policy the premiums would be far higher than necessary as the need for certain parts of that cover is likely to expire during the policy life, such as a mortgage being repaid.”
In some cases, the most appropriate solution might be neither.
“The chances of passing away whilst there’s still a mortgage debt or dependants to support is now small compared to the chances of being off work through illness,” says Thomson.
Both term and whole life clearly have a place to help dilute what could otherwise be catastrophic financial impacts. That said, other cover should not be overlooked – not least protection against the effects of long-term sickness or injury – but that’s another story.
Stephanie Spicer is a freelance journalist. She was previously editor of Cover magazine and Protection Strategy and launch editor of Corporate Adviser magazine.
Feature first published in Zurich’s Advice Matters