Whole vs term cover: a life insurance guide
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How does life insurance work?
Life insurance is one way to provide for your family when you’re no longer around. If you pass away before the end of the policy, your loved ones will receive a lump sum to pay for your funeral, cover mortgage or rent payments, and maintain their standard of living.
- The cost of the monthly payments into your policy will depend on:
- your personal circumstances, for instance, age, health, job, dependants, and debts
- what you want the lump sum to pay for, for example, to pay off a mortgage or maintain your family’s quality of life
- how much cover you need
However, not all life insurance policies are the same, and there’s plenty to consider before buying one. The main types of life insurance are whole life and term insurance, which differ in how long they last and how they pay out. In the following sections, you’ll discover what these options include and how to choose the best one for your needs.
What is term life insurance?
Term life insurance provides you with cover for a set period of time, generally between 10 and 30 years. If you die during the term of the policy, your family will receive a lump sum payout.
Term life insurance is generally cheaper than whole life insurance. This makes it an attractive option if you want to protect your family but also avoid paying high premiums. A term policy may also be suitable if you only need life insurance for a specific reason, such as paying off your mortgage so your family can stay in their home.
The main downside to term life insurance is that if you die after the policy ends, your family will receive nothing.
There are three types of term life insurance: level term and decreasing term. With level-term life insurance, your monthly premiums stay the same for the entire term. This can be ideal if you want to leave a set amount to your family or cover a fixed debt such as an interest-only mortgage. Should you choose decreasing term life insurance, your premiums will decrease over time. This may be a better option if you want to cover a decreasing debt, such as a repayment mortgage, or if you expect your family’s financial needs to reduce over time.
What is whole life insurance?
The other option is to take out a whole life insurance policy.
Whole life or whole of life insurance covers you for your entire lifetime.
The cost of your premiums will depend on your personal circumstances and the level of payout you want your family to receive. As long as you continue to pay into the policy, your family is guaranteed to receive a lump sum when you die.
The main downside to whole life insurance is that it generally costs more than term life insurance.
Some whole life insurance policies may require you to pay premiums up to a certain age, typically 90 years old, while others may have fixed premiums that stay the same throughout your policy.
If you continue to pay into a whole life insurance policy, however, you have the guaranteed reassurance that your family will receive a payout on your death.
What is the difference between whole life and term insurance?
The main difference between whole life and term insurance is the length of cover. Whole life insurance covers you for your entire lifetime if you continue to pay into the policy. Term life insurance, by comparison, only covers you for a set period of time.
Here are the other key differences:
| Key Difference | Whole of life insurance | Term life insurance |
| Payout | Guaranteed whenever you die | Only if you die during the term of the policy |
| Cost | Generally more expensive than term life insurance | Generally less expensive than whole of life insurance |
| Benefits | Can be used for estate planning, inheritance tax, or leaving a legacy | Protects your family for a specific reason or period |
How to choose between whole life and term insurance?
Choosing the right type of life insurance policy depends on your personal circumstances, your goals, and your preferences. There is no one-size-fits-all answer, but there are factors that can help you make an informed decision.
Knowing why you’re taking out life insurance will point to which option is best for you. For example, if you want to make sure that your family will receive a payout no matter when you die, or if you want to use your life insurance to leave a legacy, then whole life insurance might be the best option for you. However, if you only need life insurance for a specific reason or period of time, such as paying off your mortgage or protecting your children until they are financially independent, then term life insurance might be more suitable.
Other factors to consider include:
- The cost of the premiums: Whole life insurance is generally more expensive than term life insurance because it guarantees a payout whenever you die. Term life insurance is more affordable and flexible, but it also has an expiry date. You need to consider how much you can afford to pay each month, and how long you are willing to pay for.
- The amount of the payout: Whole life insurance usually offers a lower payout than term life insurance because it covers you for your entire lifetime. Term life insurance usually offers a higher payout because it only covers you for a specific period of time. You need to consider how much money your family will need in the event of your death, and how that might change over time.
- Benefits and drawbacks: Whole life insurance and term life insurance have different pros and cons that may make them more or less suitable for your needs. Weigh up the advantages and disadvantages of each type of policy to decide which one offers the best value and protection for you.
If you still don’t know which type of life insurance policy is best for you, don’t worry. The Insurance Surgery will discuss the options with you and help you decide. We’re experts in finding the best life insurance deals for our customers, and we will guide you through the entire process.
Will you be taxed on either whole of life or term life insurance?
Generally, life insurance payouts are not taxed as income or capital gains, so your family will receive the full amount. However, there is one type of tax that may apply to your life insurance payout: inheritance tax (IHT).
Inheritance tax is charged on the value of your estate when you die. Your estate is everything that you own, such as property, money, investments, and personal possessions. The current IHT threshold is £325,000 per person. This means that if your estate is worth more than this amount, anything above the threshold will be taxed at 40%.
Your life insurance payout may be counted as part of your estate, even though it goes directly to your family. This means that if your estate is already close to the IHT threshold, your life insurance payout may push it over the limit and trigger a tax bill for your family.
The best way to protect against this is to place your life insurance policy in a trust. By doing this, you remove the life insurance payout from your estate.
Another way to avoid or reduce IHT on your life insurance payout is to make use of the IHT exemptions and allowances. For example, you can leave up to £325,000 to anyone without paying any IHT. This amount can be doubled if you are married or in a civil partnership and leave everything to your spouse or partner. You can also leave up to £175,000 of your main home to your direct descendants without paying any IHT.
One other option is to reduce the value of your estate by making gifts to your family and friends during your lifetime. However, there are rules and limits on how much you can give away without paying any IHT.
The best way to avoid or minimise any tax liability is to plan ahead and seek professional advice before buying a policy.
How much should I pay for life insurance?
There’s no simple answer to this question. It will depend on your personal circumstances and how you want to provide for your family after your death. Factors that may affect the cost of your premium include your age, lifestyle, health, and the amount of payout you’d like to provide.
A good start is to consider the following questions:
- How much money do you and your family spend each month?
- How much income do you and your family make each month?
- How many people depend on you for money and support?
- What are your family debts, including your mortgage?
- Do you have any other financial protection in place such as death-in-service benefits?
Do you need to take a medical for life insurance?
One of the questions that many people have when buying life insurance is whether they will have to undergo a medical examination. The answer depends on the type of policy you choose the amount of cover you want, your job, lifestyle, and health.
Most life insurance providers offer cover without a medical, especially if you’re young and healthy. However, some insurers may require you to have a medical if they have concerns about your health, lifestyle, or job.
How to compare insurance quotes
When you’re looking for life insurance, you might be tempted to use comparison sites to find the cheapest deal. But it’s worth bearing in mind that price comparison doesn’t always mean quality comparison. You could end up paying for a policy that doesn’t suit your needs or offer enough protection.
That’s why it’s important to speak to a broker who can explain exactly what you need and answer your questions. A broker can help you to compare different policies and providers based on your personal and financial circumstances, your goals and preferences, and the type and amount of cover you want. A broker can also advise you on how to avoid or reduce any tax liability, how to set up a trust for your policy, and how to make use of the exemptions and allowances that are available for inheritance tax purposes.
The Insurance Surgery is a leading insurance broker for life insurance. We work with a wide range of insurance providers to get the best life insurance policy for your needs and budget. We don’t provide life insurance quotes online. Instead, we offer a personalised service over the phone, taking the time to get to know you and exactly what cover you need. Working with our extensive pool of insurance providers, we often have access to policies that aren’t available to the general public.
The Insurance Surgery has a proven track record of helping people who have been declined for life insurance. We also have a price promise which means that our quotes won’t be cheaper anywhere else. You can trust us to find the right policy at the right price.
We answer your most frequently asked questions.
The answer to this question depends on your personal circumstances, your goals and preferences, and the type and amount of cover you want. Here are some general points to consider when comparing term and whole life insurance:
Term life insurance is cheaper, more flexible, and offers a higher payout than whole life insurance, but it only covers you for a specific period of time and only pays out if you die within that period.
Whole life insurance is more expensive, more fixed, and offers a lower payout than term life insurance, but it covers you for your entire lifetime and guarantees a payout whenever you die.
Ultimately, the best type of life insurance policy for you depends on your individual situation and needs.
Whole life insurance covers you for your entire lifetime and guarantees a payout whenever you die. The main disadvantages of whole life insurance are:
• It’s more expensive than term life insurance because it covers you for a longer period of time.
• It’s less flexible than term life insurance because you usually pay the same premiums and receive the same payout throughout your policy.
• If your life insurance payout is counted as part of your estate when you die, it may be subject to inheritance tax (IHT).
Whole life insurance isn’t suitable for everyone. It’s best to seek professional advice before buying a policy.
Yes. Getting a life insurance plan for your mortgage is an excellent idea, as it ensures that your mortgage is paid off if you or your partner passes away.
Whole life insurance covers you for your entire lifetime. Term life insurance covers you for a set period of time. With whole life insurance, the lump sum payout is guaranteed. With term life insurance, your family will only receive the lump sum payout if you die during the term of the policy. Whole life insurance is generally more expensive than term life insurance because it covers you for your whole life.
Whole life insurance is only better than term life insurance if it is more suitable for your needs and circumstances. There are two main reasons why whole life insurance might be better for you and your family. The first is that it guarantees a payout whenever you die, as long as you keep paying the premiums. The second is that it can be used for estate planning or to leave a legacy.
If you outlive your policy term, you will no longer be protected. This means that if you die after your plan has come to an end, your family will receive nothing. One solution is to extend your policy or take out a new life insurance policy.
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