What is term life insurance?
Term life insurance covers you for a fixed period — typically 10, 20, 25, or 30 years. If you die during the term, the policy pays out a lump sum to your beneficiaries. If you outlive the term, the policy simply ends with no payout and no return of premiums.
Term insurance is the most common and affordable type of life insurance in the UK. It is designed to provide financial protection during the years when your family is most financially vulnerable — for example, while you have a mortgage, young children, or outstanding debts.
Types of term life insurance
- Level term — the payout amount stays the same throughout the policy. Ideal for covering a specific financial need like providing for dependants
- Decreasing term — the payout reduces over time, usually in line with a repayment mortgage balance. Cheaper than level term but only suitable for debt cover
- Increasing term — the payout rises each year (usually linked to inflation) so cover keeps pace with the cost of living. Premiums are higher
- Family income benefit — instead of a lump sum, this pays a regular tax-free income to your family until the end of the term. Often the most cost-effective way to protect a family
What is whole of life insurance?
Whole of life insurance covers you for your entire life, no matter when you die. As long as you keep paying premiums, the policy is guaranteed to pay out. This certainty makes it popular for inheritance tax planning and covering funeral costs.
Whole of life premiums are significantly higher than term insurance because the insurer knows they will eventually have to pay. Some whole of life policies include an investment element, where part of your premium goes into a fund. However, the investment returns are rarely competitive compared to standalone investments.
Types of whole of life insurance
- Standard whole of life — fixed premiums with a guaranteed payout. Premiums are reviewed periodically and can increase
- Unit-linked whole of life — part of your premium is invested. The payout depends on fund performance, which adds risk
- Over 50s plans — guaranteed acceptance with no medical questions. Lower payouts and a typical waiting period of 12 to 24 months before full cover applies
How do the costs compare?
Term life insurance is substantially cheaper than whole of life. A healthy 35-year-old non-smoker might pay around £8 to £15 per month for £250,000 of level term cover over 25 years. The same person could expect to pay £80 to £150 per month for a whole of life policy with £250,000 of cover.
The reason for this price difference is straightforward: with term insurance, the insurer only pays out if you die during the term. Statistically, most term policies never result in a claim. With whole of life, the insurer will always pay out eventually, so they charge accordingly.
Key point: Term insurance gives you maximum cover for minimum cost. Whole of life guarantees a payout but at a much higher monthly premium.
When is term life insurance the better choice?
Term insurance is usually the right choice if you want to:
- Protect your mortgage — a decreasing term policy can match your repayment mortgage exactly, ensuring it gets paid off if you die
- Cover your family while children are young — a 20 or 25 year term covers the period until children are financially independent
- Replace your income — family income benefit provides a regular monthly income to your family for the remainder of the term
- Maximise cover on a budget — term insurance gives you the highest level of cover per pound spent
- Cover a specific debt — matching the policy term and amount to a loan ensures the debt can be repaid
When is whole of life insurance the better choice?
Whole of life makes more sense if you need to:
- Plan for inheritance tax — if your estate exceeds the nil-rate band (currently £325,000 per person), whole of life cover written in trust can fund the IHT bill without eating into the inheritance
- Leave a guaranteed legacy — if you want to guarantee your family receives a specific amount regardless of when you die
- Cover funeral costs — an over 50s plan or small whole of life policy ensures funeral expenses are covered without burdening your family
- Provide for a disabled dependant — if you have a lifelong caring responsibility, whole of life ensures financial provision continues after your death
Can I have both types of policy?
Yes, and this is often the most practical approach. Many people take out an affordable term policy to cover their mortgage and family needs during their working years, and then add a smaller whole of life policy for inheritance tax planning or funeral costs later in life.
A specialist life insurance broker can help you structure the right combination of policies to cover all your needs without overpaying.
What happens if I cancel my policy?
With term insurance, if you cancel or stop paying premiums, the policy ends immediately with no payout and no refund. There is no cash-in value.
With whole of life, some policies build up a surrender value over time, especially unit-linked plans. However, the surrender value is often much less than the total premiums you have paid, particularly in the early years. Cancelling a whole of life policy is generally a poor financial decision unless your circumstances have changed significantly.
Warning: Never cancel an existing life insurance policy before a new one is fully in force. If your health has changed, you may not be able to get replacement cover.
Tax treatment of life insurance payouts
Life insurance payouts are not subject to income tax or capital gains tax. However, if the policy is not written in trust, the payout forms part of your estate and could be subject to inheritance tax at 40% on amounts above the nil-rate band.
Writing your policy in trust is free, takes minutes to set up, and ensures the payout goes directly to your beneficiaries outside of your estate. Most insurers provide trust forms as standard — your broker can arrange this at the point of application.
How to decide which policy is right for you
Ask yourself these questions:
- What specific financial risks am I trying to cover? If they are time-limited (mortgage, children growing up), term is usually better
- Do I need a guaranteed payout whenever I die? If yes, whole of life is the answer
- What is my budget? Term insurance costs a fraction of whole of life for the same cover amount
- Am I concerned about inheritance tax? Whole of life written in trust is a proven IHT planning tool
- Do I want the simplest, most cost-effective option? Term insurance wins on value
The best approach is to speak with a qualified life insurance broker who can assess your circumstances and recommend the right type and level of cover. Nesto matches you with an FCA-regulated life insurance specialist in minutes — completely free with no obligation.