The non-profit whole-life policy has traditionally been regarded as a useful method of obtaining permanent cover for the younger man, but the past two decades have undermined its value for this purpose.
First, the effect of inflation has eroded the value of the sum assured. In 1990 a 30-yearold man might have thought a £500,000 sum assured would be ample for long-term protection for himself and his family. At the present day it is far from adequate. Secondly, the rate of interest assumed to be earned by premiums under the non-profit whole-life policy has always been very low. Actuaries have taken the view that they have to be cautious in making assumptions about interest rates which have effect over such long periods.
So in 1990 premiums could have been based on an assumed net interest rate of 3-4%. The actual interest earned has been well in excess of this - but the non-profit policyholder has not benefitted. Thirdly, mortality experience is improving. The reduction in mortality between 1999 and 2013 has been such as to justify a reduction in premiums on non-profit whole-life policies of up to 20% for younger ages. Again, the policyholder has received no benefit from this, since his premium was set at the old rates and cannot be adjusted.
In practice, what has happened is that, as interest rates have risen and mortality improved, companies have lowered their premium rates on non-profit policies, while existing policyholders have been locked into the higher rates they had originally contracted to pay and have therefore received a very poor return on their money.
The modern tendency, therefore, is to purchase protection on a shorter-term basis through term assurance and FIB. In theory, this will prove more expensive overall, but then this also accords with the trend of income since the young man has little to spare, and therefore wants the cheapest protection. At middle age he has surplus income and may not mind too much if his life insurance is costing him a lot more than it would have if he had taken it out 10 years previously when he could not afford it.
Comparison of the table of non-profit whole-life rates (Table 5, p. 49) with the term rates shown in Table 3, p. 28, will show that for the younger man the saving with term assurance is substantial.
Whereas term assurance offers protection over limited periods, permanent protection is provided by the whole-life policy. Here the company guarantees to pay the sum assured on death whenever this occurs in return for the payment of fixed annual premiums throughout life. Though premiums are frequently made payable only up to retirement age or to age 65, the company is taking on a risk, as in term assurance, that the policyholder will drop dead the day after starting to pay premiums; but it is also taking on a certainty, the certainty that the policyholder will die at some time. Since the sum assured is,... see: Till Death Us Do Part