What is term life insurance and how does it differ from whole of life insurance?

Full answer

Choosing between term and whole of life insurance is one of the most common life insurance decisions UK households face, and the two products serve quite different purposes. **Term life insurance** Term insurance provides cover for a fixed period -- commonly matched to a mortgage term (such as 25 years) or until children are expected to become financially independent. If you die within the term, your beneficiaries receive the agreed lump sum (or, for decreasing term insurance, a reducing amount broadly tracking your remaining mortgage balance). If you outlive the term, the policy simply ends with no payout and no refund of premiums -- this is why term insurance is significantly cheaper than whole of life cover. **Types of term insurance** Level term insurance pays a fixed sum assured throughout the term. Decreasing term insurance has a sum assured that reduces over time, often used alongside a repayment mortgage since the outstanding mortgage balance also decreases. Increasing term insurance rises over time, sometimes in line with inflation. **Whole of life insurance** Whole of life insurance guarantees a payout whenever you die, provided premiums continue to be paid, since there is no fixed end date to the cover. Because a payout is certain (rather than only occurring if death falls within a set term), premiums are considerably higher than for equivalent term cover, and can increase over time on some "reviewable" policies. **Common uses for each** Term insurance is typically used to cover a specific financial need with a natural end date, such as a mortgage or a period of raising dependent children. Whole of life insurance is more often used for estate planning, inheritance tax planning (particularly when written in trust to help cover an eventual IHT bill), or ensuring funeral costs and final expenses are always covered, regardless of when death occurs. **Worked example** A couple with a 25-year repayment mortgage and young children choose decreasing term life insurance matched to their mortgage term, since their protection need naturally reduces as the mortgage balance falls and the children grow up -- this is typically far cheaper than whole of life cover for the same initial sum assured. **Practical tip** Consider writing any life insurance policy in trust, which can help the payout avoid Inheritance Tax and reach beneficiaries faster, without going through probate.

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