Participating Policy – How to Earn Money on Life Insurance
Life insurance can be a complicated part of personal finance. There’s no doubt that having some sort of life insurance in place is a good thing, no matter what your level of income, but finding the right path that suits you can be more in-depth than you might like!
While a lot is written regarding term life insurance, designed to cover mortgages and the working period of your life, less is there to explain participating whole of life insurance or some of the other life insurance policies.
On the face of it, Whole of Life insurance is the simplest of all life insurance policies. At its core, it represents a guaranteed payout policy that lasts from the moment you take out the cover until the moment you die.
Term variants of life insurance can be seen somewhat as a gamble for the life insurance company – after all, they are wagering the value of your insurance against the chance of your death during the term. There is no gamble with Whole of Life policies – there’s a 100% guarantee that the policy will pay out the stated amount eventually.
To mitigate this, whole of life policies have premiums which cover this total pay out amount. In simple terms, if you were expected to live at least 10 years, and the cover was for £10,000, the insurance company would have to charge you a premium where you pay at least £1000 per year. This way, they can be reasonably reassured that you will pay enough into the policy that it is worth it to them.
Why not just save the money yourself? You would then gain interest on the amount.
Quite aside from the complex nature of tax and savings, the idea of eschewing life insurance and replacing it with a savings or investment account does occur to some. The problem comes as soon as you look at the gamble that you are now undertaking:
If you die before the savings are equal to the proposed insurance value, you are obviously worse off than an equivalent life insurance policy.
Correctly tailored, a whole of life insurance policy provides a peace of mind that your loved ones are not left with less money than you want them to have – whether it is just to cover the cost of your funeral, or as a more substantial inheritance.
There are, of course, benefits to be had with both. By combining the security structure of a life insurance policy with the growth and investment of a savings account, it is possible to use your money in a way that provides the best of both worlds.
Participating Whole of Life Policy
One option, though rare, is participating whole of life cover. This type of life insurance is particularly popular in the US and is available with some UK insurance companies.
Participating policies pay dividends on your whole of life insurance by taking a portion of your premiums and using that money to invest in the company providing your cover. These dividends are then paid to you in one of three ways:
A cash sum
As a replacement for premiums, freeing you from one or more monthly payments
As an increase on the sum assured – the final pay out value of your policy
Tying this sort of investment return on to your life insurance policy allows you to have a savings structure linked with your simple single monthly premium payment – essentially earning you money on your life insurance product.
Far more prevalent across the UK are endowment policies. Similar in many ways to dividend paying participating whole of life cover, endowment policies allow the insurer to take part of your monthly premiums and invest them in multiple ways.
For more information on endowment policies, read our article on the subject.
Of course, with any sort of investment policy, there is an amount of financial risk, and you should always understand the terms of your cover and what risk is involved before going ahead.
At their most basic, premiums are calculated on:
The risk involved in your life insurance (age, health etc.)
Any additional benefits, such as endowment investment or dividends
The length of your insurance term
They are then usually paid for the entire length of the term, although some whole of life policies will offer an early end to premium payment yet continue the cover until death.
Understanding the calculations used to determine your policy premiums is almost impossible without first-hand information from the company underwriters, but for the savvy investor, understanding where the money goes can open up other options. These may be more complicated and require a greater level of administration on your personal finances, but can increase your end portfolio by thousands.
Due to the structure of a term life insurance plan over whole of life cover, the premiums associated with level term policies are almost always cheaper than whole of life versions for identical sums assured.
Can it possibly make sense, therefore, to opt for a term plan and invest or save the difference? There are two major mitigating factors that might make the answer a resounding ‘no’:
At the end of each term, a new policy must be instigated to continue cover. At this point, you will be taking out life insurance as an older person with poorer health and the premiums will increase dramatically as a consequence.
In an ideal world, the idea that you would calculate the difference in premiums between your term cover and a comparable whole of life alternative to put that difference in savings seems viable. In reality, the complexity of the personal administrating means it rarely happens.
Replacing an investment-linked whole of life insurance policy (either endowment, or participating whole of life) with separate level-term life insurance and investment portfolio is often simply too complicated to be worthwhile.
Looking After Loved Ones
Remember, the main reason for taking out a life insurance policy is to have the peace of mind that your loved ones are taken care of upon your death. There is no savings account or non-insurance investment portfolio that is ever truly going to give that assurance.
When it comes to providing for your family, choosing an appropriate life insurance policy is a must – and an additional investment opportunity can provide icing on that essential cake.