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Is term life insurance better or whole of life insurance?

In this guide, we look at whether term life insurance or whole of life insurance is best for you and why.

A photo of Daniel Sharpe-Szunko, the author

By Daniel Sharpe-Szunko

Published on: 13 May 2022

5 min read

Is term life insurance better or whole of life insurance?

Life insurance is designed to protect your family if you die, so that they don’t suffer financially on top of the emotional distress of losing a loved one. Statistically a child loses a parent every 20 minutes in the UK, which is an alarming number.

A life insurance policy will provide a single lump sum or a regular income to your family. These funds can help replace any lost income and the support that you would provide. There are many reasons why you should consider life insurance to protect your dependents and loved ones. This includes your own peace of mind.

There are many different types of life insurance. There is term life insurance which is by far the most popular and affordable. There is also whole of life insurance which is the one that everyone wants, as it provides extensive long term cover.

In this guide, we look at whether term life insurance or whole of life insurance is best for you and why.

What is term life insurance?

Term life insurance is by far the most popular type of life insurance. It is also generally the most affordable policy to many of us. Term life insurance works by providing an amount of cover (sum assured) over a period of time (years). The insurance company will then give your family a lump sum if you die.

There are several different types of term life insurance that are designed to protect your family for different reasons. You can use term life insurance for a number of different things to protect your loved ones, including:

  • Level term insurance (family protection) which pays out a level lump sum if you die during the term of the policy.
  • Decreasing term insurance (mortgage protection) which pays out a decreasing amount of cover that reduces alongside your mortgage as you make repayments.
  • Family income benefit is a slightly less common type of life cover that pays out an amount annually or monthly to your family to replace your income over the remaining term of the policy.

What is whole of life insurance?

Whole of life insurance is set up in exactly the same way as term life insurance. You would apply for cover through an insurance broker or direct with an insurer. It is underwritten in the same way, which means that your medical history and lifestyle would be considered as part of the application process to assess risk.

The main difference between whole of life insurance and term life insurance is that whole of life cover does not have a set term. Cover will continue until you die and will pay out a lump sum to your family at that point, regardless of when that is.

Effectively, whole of life insurance is ‘guaranteed’ to pay out a lump sum to your family when you die, as long as you continue to pay your premium payments. If you stop paying your monthly premiums then your cover would cease, either immediately or after 3 months with some insurance providers.

Finally, whole of life insurance premiums will be significantly higher than traditional term life insurance premiums, so it’s not all good news. Premiums for this type of cover can make it unaffordable for many and it is specifically designed to protect families against things like Inheritance Tax (IHT) liability.

Many of us would naturally want to be guaranteed a pay out at the end of our insurance term, but this isn’t always affordable or the best option for many.

Term life insurance vs whole of life insurance

Here are some of the main differences between the two different types of cover in summary, and things to think about.

Term life insuranceWhole of life insurance
Will have a period of time until cover runs out which is usually 5 to 50 years (often can be taken up to age 90)Is guaranteed to pay out a lump sum to your beneficiaries when you die (as long as premiums are paid)
Premiums will be cheaper than whole of life insurance so higher levels of cover might be more affordablePremiums are likely to be considerably higher for an equivalent amount of cover
Designed to pay out a lump sum to your family to pay off your remaining mortgage balance and pay for raising childrenPays out a lump sum to your beneficiaries to pay for any Inheritance Tax liability, funeral expenses or to provide a legacy
Premiums are usually fixed (guaranteed) so it can be easier to budget over the term of the policyPremiums can be fixed (guaranteed) but can also be variable for some types of whole of life insurance policies
Policies can be written in to Trust to avoid paying Inheritance Tax (IHT) on any benefit that is paid outPolicies can be written in to Trust to avoid paying Inheritance Tax (IHT) on any benefit that is paid out
There is no cash in value to this type of policy and therefore premiums are lost if no claims are made or premiums stopEven though there is no cash in value, some policies have a cancellation clause and there is a guaranteed pay out on death
No qualifying period so cover will start immediately from the point that the policy startsSome policies might include a qualification period, this generally applies to over 50s life insurance policies
Policies are medically underwritten and there should be no medical or lifestyle exclusionsSome policies are medically underwritten (involve medical questions) and others are guaranteed acceptance (over 50s life insurance)

Generally speaking, there are many different options when thinking about taking out a new life insurance policy, or reviewing an existing policy. You should make sure that you do your research and if you need advice then you should speak to a qualified life insurance expert.

There are a number of different life insurance providers in the UK that all offer different types and levels of cover, and who charge different prices. To make sure that you get the best life insurance and your premiums are lower, it’s worth speaking to a life insurance broker that has access to multiple or all insurers.

For whole of life insurance, it is strongly advised to speak to a life insurance expert who can tell you which cover is best and find the lowest premiums for you.

Resources – Life insurance statistics

Statista – Life insurance industry in the United Kingdom (UK)

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