Whole of life assurance: what is it, why does a whole generation distrust it, and what has changed?

Full transcript

This is what is said in the video, with the figures written as numbers. Timestamps open the video at that point. The words are not changed after publication: where something said needs correcting or qualifying, a dated note sits beside it. The narration uses a digital clone of Steve Hunt's voice. The words are his own.

0:00Today's question

Today's question... whole of life assurance. What is it, why does a whole generation distrust it, and what has changed? I'm Steve Hunt. I'm a Chartered Insurance Risk Manager and a Trust and Estate Practitioner, and I answer the questions that you ask.

0:26What is whole of life assurance?

Whole of life assurance, what is it? Traditionally and conventionally, since 1774, it's where a monetary value is put on a person's life, for example £500,000, which is called the sum assured. And when that person dies, that £500,000 is paid out by an insurance company. And in its basic, traditional form, it's as simple as that.

0:57Before 1774: life assurance as gambling

Before 1774, it was commonplace for the rich and famous of that time to take out life assurance on complete strangers, and even kings and queens. This was done largely in the coffee houses in and around London, and was actually a form of gambling, which is why the 1774 Life Assurance Act was also known as the Gambling Act.

1:26Insurable interest and the 1774 Act

That Act's main purpose was to put in place something called insurable interest, which meant, quite simply, you could not take out a life assurance policy on someone unless you had an insurable interest in that person. And insurable interest was further defined as suffering a financial loss if that person were to die. The law as it stands today says that an individual, or their spouse or civil partner, has an unlimited insurable interest.

So, if you've got the funds, a husband could insure his wife for £10 million, or even £100 million. There is no limit, other than an insurance company accepting the risk. And you being able to pay the premiums. Many a Hollywood film has been built on this.

2:25Why does a whole generation distrust it?

So why does a whole generation distrust it? To a large extent, whole of life assurance plodded along for 200 years, doing exactly what it was designed to do: pay out a lump sum on death. And the whole of life policy was also used as a tool to cover death duties, or legacy tax, stamp duty payments that were due when an estate was inherited.

So what did happen to this bastion of estate and legacy planning?

2:59The unit-linked companies

It was the unit-linked companies. Again, I have written extensively about this in my LinkedIn articles, which you can see on screen now and are in the description below. I'm pretty sure that any boomer watching this video will recall the insurance company Allied Dunbar, who, when I was working at MGM Assurance in the 80s, were affectionately known as Allied Crowbar, for their rather aggressive sales tactics.

These companies came in with very deep pockets, and not only challenged the traditional life office status quo that had been happily plodding along for 200-plus years, but rather ambushed it entirely, bringing in a whole new concept and design: the unit-linked whole of life policy. These policies were, in almost every aspect, completely different to the traditional insure-your-life, fixed payment on death plans that had existed up to that point.

The only similarity was a payout on death. But even then, the premiums could be reviewed. To keep the same cover, the premiums could go up, or the cover could be cut. Some policies simply lapsed, with nothing to show for years of premiums. So, for some, not whole of life at all.

4:27The wild west before 1988

This was the wild west of the life assurance salesman, largely before the new rules on selling investments came in, in 1988. And these unit-linked whole of life plans were sold by the hundreds of thousands, possibly even millions. There were occasions where, on death, the sum assured paid out fell significantly short of the premiums paid in. And we boomers witnessed all of that in real time. We saw the foot-in-the-door life assurance salesman.

We saw the policies taken out, not even covering the premiums paid on death. We witnessed first-hand the mis-selling. And I suspect there are millions of boomers who have vowed never to be a victim of what were largely seen as scams. And you can't blame them.

5:23What has changed?

So what has changed? Today, whole of life assurance is whole of life again: a premium guaranteed from day one, and a payout whenever death occurs, provided the premiums are paid. And the main point I want to get over in this video is that conventional whole of life can be described as:

5:46Generational wealth transfer: Mr Miggins at 75

Generational wealth transfer. Let me show you why, with a real example. A real quotation, for Mr Miggins, 75. £500,000 of whole of life assurance, written in trust. The premium: £1,555.20 a month, guaranteed. That's £18,662.40 a year. If Mr Miggins dies in five years, at 80, he has paid £93,312 in premiums. And the insurance company pays to the trust: £500,000. Dies in ten years, at 85. Premiums paid: £186,624.

Paid to the trust: £500,000. At 90. Premiums paid: £279,936. Paid to the trust: £500,000. At 95. Premiums paid: £373,248. Paid to the trust: £500,000. And at 100 years in age. Premiums paid: £466,560. Paid to the trust: £500,000.

7:21Keep the money instead: 40% or 60%

Now compare that with the premium money, if not used to pay the premiums, staying in his estate. Left in his estate, it's taxed at 40% IHT, or even 60%. Die at 80, and that £93,312 he would have paid in premiums, and now still in his estate, after 40% IHT, leaves his family £55,987. The post IHT benefit to the family, without whole of life: £55,987.

But if he uses that exact same money for premiums on a whole of life plan, the family trust gets £500,000. But. If those £93,312 he would have paid in premiums to his whole of life plan stay in his estate, and tip his estate over the £2 million amount, then the net amount to the family could be as little as £37,325.

So the die at age 80 scenario would be: Have whole of life, and the family trust gets £500,000. Keep the money and pay IHT at 40%: £55,987 net to the family. And if that retained £93,312 takes the estate over £2 million, it could leave the family as little as £37,325.

9:13Car insurance, term insurance, whole of life

Now think for a moment about the insurance you already pay for. Car insurance. House insurance. If it doesn't pay out, it's a cost. Term insurance is the same. If you don't die, and most people won't in the short term, then in that respect it's a cost. It has cost you money. No different to car insurance or household insurance. Whole of life assurance is different. The premiums are not lost.

As the table shows, the trust gets back more than Mr Miggins pays in, unless he lives to nearly 102. And the premiums must be paid for life. Stop the premiums, and the cover stops. Whole of life assurance is wealth transfer. The premiums Mr Miggins pays today, buy £500,000, paid to the trust for the next generation, tomorrow. And die young, the trust gets considerably more than he paid in.

10:24The answer in three lines

So, whole of life assurance. What is it? A sum assured on a life, paid when that person dies. Why does a whole generation distrust it? The unit-linked plans of the 80s. And what has changed? Guaranteed premiums, and generational wealth transfer.

10:44The two whens: age and health

It is assured, certain to happen, the only unknown is when. But there are two whens. The first is when will the insurance company pay out, if you have a policy. The second is how long cover will remain available to you.

It's an uncomfortable truth that a future scan may not be clear, or a blood test may need follow-up, and that could mean this type of whole of life cover is not available to you. The point is that age and health are key deciding factors, and neither are static, and that is something you should be aware of. Because to get whole of life assurance, the insurer looks at your age and your health.

They decide the premium, and whether they'll offer it to you at all.

11:41James Dodson and the Amicable Society

Even James Dodson, the man who worked out the level premium system, the way whole of life assurance is still priced today, was refused cover by the Amicable Society, for being over 45. He died in 1757, before the Equitable Society he had planned opened its doors, leaving three children unprovided for. I've written about him, and the pastor who started it all, in my LinkedIn article, which you can see on screen now.

12:17What's next, and Roy Jenkins

Your options from April 2027, and how to not give away more of your pension to HMRC than you have to, will be the subject of my next video.

And I will leave you again with those famous words from Roy Jenkins, from March 1986, as true now as it was then, when talking about inheritance tax, saying that it was a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue. Thank you.