One of the first decisions when buying life insurance is whether to choose term or whole of life cover. They work very differently, cost very different amounts, and suit different needs. This guide explains term versus whole of life insurance, the pros and cons of each, and how to decide which is right for you.
The basic difference
Term life insurance covers you for a fixed period, the term, and pays out only if you die within it. Whole of life insurance covers you for your entire life and is guaranteed to pay out whenever you die, as long as you keep paying the premiums. In short, term cover is protection for a defined period of risk, while whole of life is permanent cover designed to pay out eventually, whatever happens.
How term life insurance works
With term cover, you choose an amount of cover and a length of time, such as 20 or 25 years, often to match the period your family is financially vulnerable, for example while children are growing up or a mortgage is being repaid. If you die during the term, your beneficiaries receive the sum assured. If you outlive the term, the policy simply ends and pays nothing. Because it may not pay out, term cover is much cheaper than whole of life.
How whole of life insurance works
Whole of life cover continues for as long as you live and pays out whenever you die, which means a claim is effectively certain. That certainty makes it more expensive, since the insurer will have to pay out at some point. It is often used for specific goals, such as leaving a guaranteed inheritance, covering a funeral, or helping with an inheritance tax bill, rather than simply replacing income for a set period.
Comparing the cost
Cost is the biggest practical difference. Term insurance is relatively cheap, especially for younger, healthier people, because there is a real chance it will never pay out. Whole of life is considerably more expensive for the same sum assured, because a payout is guaranteed. For most families wanting to protect against a specific period, term cover provides the most protection for the lowest cost, as our guide to how much cover you need discusses.
When term insurance is the right choice
Term cover suits the most common need: protecting your family during the years they depend on you. If you want to make sure a mortgage would be repaid, or that your children would be provided for until they are independent, term insurance does this affordably. Because the risk it covers is temporary, by the time the term ends your mortgage may be cleared and your children grown, so the cover is no longer needed.
When whole of life insurance is the right choice
Whole of life cover suits goals that are not tied to a fixed period. If you want to leave a guaranteed sum to your heirs whenever you die, cover a funeral, or provide a sum to help pay an inheritance tax bill, whole of life delivers a certain payout. It is also sometimes used by people who want lifelong cover and are willing to pay more for the certainty, rather than risk outliving a term policy.
Types of term insurance
Term insurance itself comes in variations. Level term keeps the sum assured the same throughout, while decreasing term sees the cover reduce over time, often to track a repayment mortgage, which makes it cheaper. There is also increasing cover that rises to keep pace with inflation. Choosing the right type of term cover matters, and our guide to level versus decreasing term explains the difference in detail.
Can you have both?
You are not limited to one type. Some people hold term cover to protect their family during the vulnerable years and a smaller whole of life policy for a guaranteed legacy or funeral costs. Others start with term cover and review their needs later. The right mix depends on what you are trying to achieve, your budget and your stage of life, which is why it can help to take regulated advice for anything complex.
Watch out for investment-linked policies
Some whole of life policies are linked to investments, and their premiums or payouts can vary depending on investment performance, which adds complexity and risk. These are different from straightforward guaranteed whole of life cover. If you are considering whole of life insurance, make sure you understand whether it is a simple guaranteed policy or one linked to investments, since the two behave very differently over the long term.
What happens at the end of a term policy
If you have term cover and outlive the term, the policy simply ends and pays nothing, as it has done its job of covering a defined period of risk. If you still need cover at that point, you would take out a new policy, but at an older age and possibly in poorer health, so the premium would be higher. This is why it is worth setting the term long enough to cover the whole period your family is likely to depend on you.
Watch reviewable premiums on whole of life
Some whole of life policies have guaranteed premiums that stay the same, while others have reviewable premiums that the insurer can increase over time, often after a review every few years. Reviewable premiums can start cheaper but rise significantly as you age, which can make the cover hard to afford later. If you are considering whole of life cover, check carefully whether the premium is guaranteed or reviewable, since it makes a big difference over the decades.
A practical way to choose
A simple way to decide is to start from what you are protecting. If it is a temporary need, such as a mortgage or raising children, term cover is usually the efficient choice. If it is a permanent goal, such as a guaranteed legacy, funeral costs or an inheritance tax bill, whole of life provides the certainty. Being clear about the purpose, rather than the product, usually points to the right type quickly.
Whichever you choose, the most important step is to put cover in place rather than delay. Premiums rise with age, so the cost of waiting is real, and a policy that exists, even a modest one, protects your family in a way that good intentions never will.
In short
Term life insurance covers a fixed period and pays out only if you die within it, making it cheap and ideal for protecting your family during the years they depend on you. Whole of life cover lasts your whole life and always pays out, making it more expensive but suited to leaving a guaranteed legacy, covering a funeral or helping with inheritance tax. Many families choose term cover for value, sometimes adding whole of life for specific goals.
Where to get help and next steps
Decide how much you need with our guide to how much life insurance you need, pick the right term type in level versus decreasing term, and read life insurance explained for the basics. This is general information, not financial advice.