A solution often suggested to this problem for the younger person is the combination of term assurance and with-profit whole-life insurance. The advantage of the whole-life policy in this context is its flexibility. The policy may be used as collateral to raise a loan; life insurance companies themselves will usually lend up to 85 - 90% of the surrender value to the policyholder, interest being paid only on the loan with the capital being repaid out of the maturity proceeds (or repayable earlier at the policyholder's option). Or the policy may be made paid-up; this means that the policyholder stops paying premiums, and the company keeps the policy in force with a reduced sum assured (bonuses already earned would not be reduced). The policy then continues to share in bonuses in the normal way (though a few companies still do not allow paid-up policies to earn any more bonuses). The disadvantage of the policy is its slow build-up in value, and for most young people, whose needs, say, 10 to 20 years ahead are uncertain, this is a considerable drawback.
Generally, therefore, whole-life is of more use and relevance to those in the higher age groups, who can use it for pure protection or investment, or both, and whose needs and incomes are more closely related to the cost and benefits provided.
One unfortunate phenomenon in the life insurance business in recent years has been the sale of whole-life policies to young people by some advisers motivated solely by commission, which until 2013 was far higher on this type of policy than any other for the same amount of annual premium. Non-profit whole-life polices are not, as such advisers sometimes claim, of any use whatsoever in obtaining a mortgage nor in providing for its repayment (taking out a non-profit whole-life policy may be the price an adviser demands to obtain someone a mortgage, but that is another and more unpleasant subject).
Students in particular - a frequent target for such selling - are in most cases ill advised to buy such policies. They will usually be better off putting whatever money they can save into a building society, as this will at least provide funds towards the purchase of a house and place them in a more favourable position to obtain a mortgage loan - factors of far greater importance at that stage of life than the modest amount of life insurance cover and a long-term investment at a very low rate of interest that the non-profit whole-life policy provides.
The with-profit policy, as we saw in Section 2, may have surplus allocated to it in several different ways. Reversionary bonuses will be added every one, two or three years to the basic sum assured, and the effect of a compound bonus rate is that the rise in the claim value of the policy grows more rapid as time goes on. Fig. 3 shows the effect of this for a younger man taking out a with-profit policy. The surrender value in the early years is low in relation to the total of premiums paid. In the first two years of the policy there is usually no surrender value at all, and not until at least seven... see: With-profit Whole-life Policies