Is Reviewable Whole of Life Insurance Right for You?

 

 

Whole of life insurance provides lifelong coverage and is a crucial component of many financial planning strategies. In Ireland, two primary types of whole of life insurance exist: traditional (fixed or guaranteed) whole of life insurance and reviewable whole of life insurance. Understanding the distinctions between these types is essential for making informed decisions about insurance coverage. We will explore the features of reviewable whole of life insurance, compared to traditional whole-life insurance, and discuss their implications through a case study comparison.

 

 

 

What is Reviewable Whole of Life Insurance?

 

Reviewable whole of life insurance is a type of policy that offers lifetime coverage with premiums and coverage subject to periodic reviews, typically every 5 to 10 years. The reviews consider factors like investment performance, mortality rates, and administrative costs, and may result in adjustments to the premiums, death benefit, or both.

 

 

Key Features of Reviewable Whole of Life Insurance

 

1. Variable Premiums: Unlike fixed policies, the premiums can change after each review period. This means they could increase, decrease, or remain the same depending on several factors.
2. Investment Component: The policy often has an investment element where part of the premium is invested to potentially offset future premium increases. However, investment returns are not guaranteed.
3. Flexibility: Reviewable policies offer more flexibility as they can be adjusted to reflect changing personal and market conditions.

 

 

Traditional Whole of Life Insurance

 

Traditional whole life insurance, also known as fixed or guaranteed whole of life insurance, provides lifelong coverage with fixed premiums and a guaranteed death benefit. The key features include:

 

1. Fixed Premiums: The premiums are constant throughout the policyholder’s lifetime, providing certainty in financial planning.
2. Guaranteed Death Benefit: The payout to beneficiaries is guaranteed and does not depend on market performance.

 

 

Comparison Between Reviewable and Traditional Whole of Life Insurance

 

Premiums and Costs

 

 

Reviewable Whole of Life Insurance: Initially, the premiums are often lower than those for traditional policies. However, after each review, premiums can increase, potentially becoming more expensive over time. This variability can pose a risk to long-term affordability. You may end up paying triple or even quadruple the premiums that you’re currently paying. This is because the insurer uses a portion of your premiums, which are unit-linked, to invest in the market, and the rest to pay for the assurance. The premium you pay versus the cover that gets paid out to you when you die depends on the investment performance, including other factors.

Traditional Whole of Life Insurance: The premiums are higher initially but remain constant. This stability provides a predictable cost structure, making it easier to budget over the long term.

 

 

Investment Performance

 

Reviewable Whole of Life Insurance: Investment performance directly impacts the premiums. If the investment performs well, it may help keep premiums stable. However, if the investments underperform, premiums can rise significantly.

Traditional Whole of Life Insurance: Investment performance does not affect premiums or death benefits directly, as these are fixed and guaranteed.

 

 

Policy Reviews

 

Reviewable Whole of Life Insurance: Regular reviews can lead to adjustments in the policy terms, offering flexibility but also uncertainty.

Traditional Whole of Life Insurance: There are no reviews, meaning the terms remain unchanged throughout the policy’s life.

 

 

 

 

How Does a Reviewable Whole of Life Assurance Policy Work?

 

 

A reviewable whole of life policy begins with the policyholder paying regular premiums for an agreed-upon amount of coverage. The insurance provider invests part of these premiums, and after a set period (usually 5 to 10 years), a review is conducted. During this review, the insurer assesses whether the current premium is sufficient to maintain the coverage based on:

 

• Investment Performance: How well the underlying investments have performed.
• Mortality Rates: Any changes in the average life expectancy.
• Administrative Costs: Changes in the insurer’s costs to maintain the policy.

 

 

What Happens When the Investment of a Reviewable Whole of Life Policy Underperforms?

 

If the investments underperform, several outcomes are possible:

 

1. Increased Premiums: The policyholder may need to pay higher premiums to maintain the same level of coverage.
2. Reduced Coverage: Alternatively, the death benefit may be reduced to keep premiums at the current level.
3. Policy Lapse: If the policyholder cannot afford the new premiums and opts not to reduce coverage, the policy may lapse, resulting in loss of coverage.

 

 

Cost of Fixed or Guaranteed Whole of Life Policies

 

Fixed whole of life policies generally have higher premiums compared to initial reviewable policy premiums. The cost depends on various factors, including:

 

• Age: Older individuals typically pay higher premiums.
• Health: Healthier individuals may receive better rates.
• Coverage Amount: Higher coverage amounts result in higher premiums.

 

 

 

Case Study Comparison: Reviewable vs. Traditional Whole of Life Insurance

 

 

Scenario: John and Mary, both aged 45, are considering whole life insurance with a coverage amount of €100,000. John opts for a reviewable whole of life policy, while Mary chooses a traditional whole of life policy.

 

 

John’s Reviewable Policy

 

• Initial Premium: €50 per month.
• Policy Review (Year 10): Due to investment underperformance, John’s premiums increase to €70 per month.
• Policy Review (Year 20): Another review leads to an increase in premiums to €90 per month, as investments continue to underperform.
• Outcome: Over time, John’s policy becomes more expensive than initially anticipated, requiring careful financial planning to maintain coverage.

 

Mary’s Traditional Policy

 

• Fixed Premium: €80 per month throughout her life.
• Guaranteed Coverage: €100,000.
• Outcome: Mary pays more initially but benefits from premium stability and guaranteed coverage without adjustments or reviews.

 

 

Medical Underwriting

 

Both reviewable and traditional whole life policies typically require medical underwriting. This involves an assessment of the applicant’s health through a questionnaire and possibly a medical exam. Underwriting determines the premiums and insurability based on health status, age, and lifestyle.

 

• Reviewable Policies: The initial underwriting may be less stringent since premiums can be adjusted later.
• Traditional Policies: Stricter underwriting may apply since premiums and benefits are fixed and guaranteed for life.

 

 

 

Why has my Reviewable Whole of Life Insurance Premium Increased?

 

 

Reviewable whole of life insurance premiums can increase for several reasons. Here are the primary factors that might contribute to a significant rise in your premiums:

 

 

1. Investment Performance

 

• Underlying Investments: Part of your premiums is typically invested by the insurance company to help offset costs. If these investments do not perform as expected, the insurer may need to increase premiums to maintain the policy’s financial stability.
• Market Conditions: Economic downturns or market volatility can negatively impact investment returns, leading to higher premiums.

 

2. Mortality and Longevity Trends

 

• Increased Life Expectancy: If people live longer than previously predicted, the insurer faces higher costs for paying out death benefits over a longer period. This can lead to increased premiums.
• Changes in Mortality Rates: Updated actuarial data indicating higher risks or costs associated with mortality can also prompt premium increases.

 

3. Administrative and Operational Costs

 

• Rising Costs: Increases in the insurer’s operational expenses, such as administration, claims processing, or compliance costs, can result in higher premiums to cover these expenses.
• Regulatory Changes: New regulations or compliance requirements can increase administrative costs, which might be passed on to policyholders.

 

4. Initial Premium Setting

 

• Underestimated Initial Costs: The initial premiums might have been set too low to attract customers. Over time, insurers may adjust premiums to more accurately reflect the cost of providing coverage.

 

5. Policy Reviews

 

• Regular Reviews: Reviewable whole of life insurance policies are subject to periodic reviews (usually every 5 to 10 years), where insurers reassess the policy’s financials and adjust premiums based on current conditions.

 

6. Lapse Rates and Policyholder Behavior

 

• Policyholder Trends: If more policyholders let their policies lapse than anticipated, it may affect the insurer’s cash flow, prompting premium increases for remaining policyholders to compensate for lost revenue.

 

 

 

What Can I Do About the Increased Premiums on My Reviewable Policy?

 

 

If your premiums have increased significantly, consider the following actions:

 

• Review your Policy: Check your policy documents to understand the terms and conditions related to premium adjustments.

 

• Evaluate your Coverage: Assess whether the current policy still meets your needs and consider reducing coverage or adjusting terms if the cost becomes prohibitive.

 

• Contact a Financial Advisor: Speak with a financial advisor who can liaise with your insurance company to get a detailed explanation of why your premiums have increased and ask for specific reasons related to your policy. A financial advisor can then help you to explore alternative insurance options or strategies to manage increased costs effectively.

 

• Shop Around: Consider comparing your current policy with others in the market to see if a better option is available, although switching policies might involve new underwriting and terms.

 

Understanding the specific reasons for your premium increase can help you make informed decisions about managing your whole of life insurance policy.

 

 

Where to from here:

 

Choosing between reviewable and traditional whole of life insurance in Ireland involves balancing flexibility with stability. Reviewable policies offer lower initial costs and flexibility but come with the risk of increasing premiums. Traditional policies provide predictability with fixed costs and guaranteed benefits, making them suitable for those prioritising stability.

 

Understanding individual financial goals, risk tolerance, and the potential impact of medical underwriting is crucial for selecting the right policy. Consulting with financial advisors can help navigate these complex options and make informed decisions aligned with long-term objectives.

E.&O.E.

 

 

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