What are the different types of life insurance?
There are two main categories of life insurance – term life insurance and whole of life insurance.
The key difference between them is that term life insurance lasts for a set period, while whole of life insurance offers lifetime cover as long as you keep up with the premiums.
Within these two main categories, there are a few different types of life insurance policy you can choose from.
Our partner LifeSearch can offer expert, friendly advice to help you find the right type of life insurance.
Give them a call on 0800 072 1147. Lines are open Monday to Friday: 8am-8pm; Saturday: 9am-2pm; Sunday: 10am-3.30pm
Term life insurance
1. Level term life insurance
Level term life insurance covers you for a fixed period of time, which you agree when you take out cover.
If you die within that period, which is known as the ‘term’, the policy pays out a fixed lump sum to your beneficiaries.
Pros:
Generally a more affordable option compared to a whole of life policy.
Gives you the certainty of knowing exactly how much the payout will be.
Cons:
The payout won’t increase with inflation, so in the longer term it might be worth less against the rising cost of living.
If you survive the policy term, level term life insurance cover won’t usually pay out.
2. Decreasing term cover
Decreasing term cover is a fixed-term policy aimed at people whose financial commitments reduce over time – for example, if you have a repayment mortgage.
Decreasing term means the amount of any payout after you die goes down over time. However, your premiums are normally fixed for the full term of the policy.
Decreasing term cover is a type of mortgage protection. As you pay off your mortgage and the outstanding balance decreases over time, so will the potential payout of your policy.
Pros:
Because the payout decreases over time, it can be more affordable than a level term policy.
Offers peace of mind that your family who live with you can remain in their home if you die.
Cons:
If the interest rate on your mortgage exceeds the rate agreed on your decreasing term policy, the potential payout may not cover the outstanding mortgage balance in full.
If you live beyond the policy term, your beneficiaries won’t receive any payout.
3. Increasing term cover
With an increasing term policy, the potential payout could increase each year in line with inflation.
Often this increase is based on a measure of the cost of living, such as the Retail Prices Index (RPI) or the Consumer Price Index (CPI), but it could also increase by a specified flat rate each year.
Choosing an increasing term policy means the potential payout should hold its value compared to the cost of living. However, your premiums will go up over time too.
Pros:
The payout will keep pace with rising living costs, offering peace of mind that it will be enough to maintain your dependants’ living standards in the future.
Although typically more expensive than a decreasing or level term policy, it could still be less expensive than whole of life insurance.
Cons:
Premiums will rise throughout the policy to reflect the higher payout.
There is often a cap on how much your payout could increase each year or a cap on the maximum sum your family could receive.
Whole of life insurance
Whole of life insurance, also known as ‘life assurance’, is a policy that lasts for all of your life and always pays out if you die (as long as you keep up with monthly payments and the claim is valid).
Depending on the policy you choose, the premiums you pay could be fixed or subject to periodic reviews (which often lead to an increase in your premiums).
You could choose between a policy with a fixed payout or one that’s linked to investments, in which case the value of the lump sum could go up or down.
Pros:
Offers peace of mind your family will receive a lump sum on your death, regardless of when you die.
Premium payments may stop once you reach a certain age, but you’ll continue to be covered after that point.
Cons:
Whole of life policies are typically more expensive than other types of life insurance.
You may have to answer questions about your medical history when you take out a policy, and you may find it difficult or expensive to find cover for pre-existing conditions.
Other types of financial protection
In addition to the above, here are some other types of cover you could consider to protect you or your family.
1. Critical illness cover
Critical illness cover could pay out a tax-free, one-off payment if you’re injured or fall seriously ill with a condition listed in your policy. There are no restrictions on how you can spend the money.
Critical illness cover can be bought as a standalone policy or added to a life insurance policy.
Pros:
Could cover living expenses if you’re unable to work due to an illness listed in the policy.
Could help you adapt your home to make living with your condition or disability easier.
Cons:
Won’t pay out if you’re diagnosed with a terminal illness or if you die during the policy term.
Not every illness will be covered – only those listed in your policy.
2. Joint life insurance
Joint life cover is a type of life insurance policy that covers two people, but only pays out once. It can be suitable for any two people who support each other financially, including married couples, long-term partners, those in a civil partnership and even business partners.
With joint life cover, you could choose a first death policy, which pays out when the first one of you dies. Or you could choose a second death policy, which could pay out after both of you die to help support any dependants.
Pros:
Because it only pays out once, a joint policy is often more affordable than taking out two separate policies.
Pays out the same regardless of who dies. Could be useful if one of you is more expensive to insure. For example, if one of you is a smoker.
Cons:
Having joint cover means only one payout, compared to two potential payouts if you take out individual cover.
If your relationship ends, a joint policy can’t normally be split, which means any premiums you’ve paid will be for nothing.
3. Family income cover
If you’re the primary earner or sole income provider in your home, you may want to consider income protection insurance. Income protection cover could support you and your family if you become unable to work due to an accident, illness or involuntary redundancy.
Offering a tax-free alternative income, this type of cover allows you to continue paying your monthly outgoings. Unlike critical illness cover, income protection insurance pays a regular monthly benefit until you can start working again, retire or the policy ends – whichever is sooner.
Pros:
Benefits are tax-free and paid monthly, to help cover regular expenses and living costs.
You can make multiple claims.
Cons:
You may not be covered for any pre-existing medical conditions.
The payout won’t cover your lost earnings in full – it will normally cover a set percentage of your monthly income.
4. Over 50s life insurance
Over 50s life insurance can be taken out between the ages of 50 and 80. As long as you pay your premiums, this type of insurance pays out a cash lump sum when you die.
Your beneficiaries can then use this to cover funeral costs, outstanding bills or to spend as they please.
Pros:
You’re guaranteed to be accepted, regardless of your health and lifestyle.
Your loved ones are guaranteed a payout, regardless of when you die, as long as you keep up with payments.
Cons:
Payouts for over 50s policies are generally lower than for other types of life insurance. If you live a long life, you could end up paying more into the policy than your loved ones get as a payout.
The payout is fixed and not linked to inflation, so its value could fall over time in relation to expenses such as funeral costs.
5. Death in service cover
Death in service cover is sometimes offered as a company benefit by your employer. It provides a tax-free lump sum to the person or people you choose as your beneficiaries. You must be on the company’s payroll to qualify for this type of life insurance.
As death in service cover is linked to your employment, which could end at any time due to no fault of your own, you may also want to consider taking out your own life insurance cover.
Pros:
You don’t have to pay a premium for this kind of cover – your employer pays that for you.
Your employer’s HR department will handle all the paperwork. All you need to do is fill out a form to designate your beneficiaries.
Cons:
Only pays out if you die while employed by the company. Once you leave the job, the cover will end.
The lump sum is often paid into a discretionary trust, which means there’s no absolute guarantee it will be paid to your chosen beneficiaries.
What’s the best type of life insurance for me?
The best type of life insurance policy for you will depend on your finances and personal circumstances. Think about:
How long do you want the policy to last?
Do you want to be covered for a set period of time? Or do you want whole of life cover?
What do you want the payout to cover?
Do you want to cover funeral costs? Do you want to pay off something specific, like a mortgage? Or do you want to ensure your family is supported financially after you die?
What can you afford? Be realistic about what you can afford. If you find yourself unable to pay your premiums, your cover could end.
To make things easier, our partner LifeSearch offers expert, friendly advice to help you find the right type of life insurance.
Give them a call on 0800 072 1147. Lines are open Monday to Friday: 8am-8pm; Saturday: 9am-2pm; Sunday: 10am-3.30pm
What else should I consider before choosing my life insurance policy?
When you’re deciding on the right type of cover, you might want to consider:
Term vs whole of life insurance
Term insurance may be the right option if you want to cover financial commitments that will eventually be reduced or paid off – a mortgage, for example, or support for children.
If, on the other hand, you’re happy to pay more, you may want your life insurance protection to extend until you die, whenever that may be. This could potentially increase financial security for dependants, pay for your funeral or help cover a possible inheritance tax bill. In this case, whole of life insurance could be more suitable.
Single vs joint policy
When deciding on taking out an individual or joint policy, consider how each of you would cope financially without your partner.
Don’t just take account of income, but consider the costs of replacing the other person’s contribution to the family, such as childcare commitments.
Level term vs decreasing term cover
If your main reason for taking out life insurance is to make sure your repayment mortgage is covered, then you could save on your premiums by choosing a decreasing term policy.
But you’ll also need to consider the other household bills that have to be paid in addition to your mortgage. A level term policy could help pay for these too.
Your age, health and lifestyle
Life insurance tends to get more expensive to take out as you get older. And your premiums could be higher if you’re in poor health or have a history of medical conditions. If you delay taking out a policy and later develop a medical condition, you could find it harder or more expensive to get cover.
Your lifestyle choices also affect how much you’ll pay in premiums. And it’s not just whether you’re a smoker. Insurance providers will factor in how risky your job and hobbies are too.
What type of life insurance payout should I choose?
Most life insurance policies pay out a lump sum when you die. But if you don’t make any special arrangements, the payout could be counted as part of your estate.
This means it could be included when calculating any inheritance tax owed and used for purposes you might not intend, such as clearing any outstanding debts.
If you want more control over who the money goes to, how it’s used and how you want it to be paid, there are a couple of options to consider:
Life insurance written in trust
Writing your life insurance in trust will keep the payout from your policy separate from your estate, so it won’t be subject to inheritance tax.
Life insurance in trust won’t go through probate, so it doesn’t have to be used to pay off your debts, and your beneficiaries will receive the payout sooner. The beneficiaries can be anyone you choose – for example, your children, other family members, friends or even a charity.
Family income benefit
Family income benefit (FIB) is a type of fixed-term life insurance policy that pays out a monthly income, rather than a lump sum. It’s worth considering if you want your family to have a regular payment to help with their day-to-day living expenses.
This type of policy can be especially useful for families with young children, as it can offer extra support with paying the bills until the children get older.
FAQs
What affects the cost of life insurance?
The cost of life insurance depends on the level of cover you want and how long you’d like it to last, as well as individual factors such as your age, lifestyle and your family’s health history.
The cost of your premium will also depend on the type of life insurance you take out. For example, a term life insurance policy is usually cheaper than a whole of life policy.
Which type of life insurance is the cheapest?
Over 50s life insurance can be the cheapest option. But it’s not available to everyone and typically has lower levels of cover. And if you live for a long time you can pay in more than is paid out.
Looking at life insurance that’s available to everyone, term life insurance tends to be the most affordable, especially decreasing term policies.
With decreasing term life insurance, the potential pay-out goes down in line with the decreasing balance on a repayment mortgage. The price of premiums tends to be lower to reflect the lower risk to the insurance provider.
When should I get life insurance?
You might want to consider getting life insurance when others become financially dependent on you.
Although there’s no such thing as the ‘right’ time to get life insurance, people often tend to think about it around big life events, such as moving house, getting married or having a baby.
How long should I get life insurance for?
It’s up to you to decide how long you want your life insurance policy to last. With a whole of life policy, the answer is simple: it lasts until you die, no matter when that happens.
If you have a decreasing term policy, you’ll probably want it to last as long as your mortgage does. A level term policy might serve you up until retirement, and family income benefit until the kids are older and financially independent.
Working out how long your policy should last could help you avoid overpaying on cover you may no longer need in the future.
Can you have two life insurance policies?
Yes you can – there’s no legal limit to the amount of life insurance policies you can hold.
In some situations, it’s worth holding multiple life insurance policies. It might be of benefit to have different types of life insurance to cover different situations. For example, you might want a term policy to cover your mortgage, and another as a lump sum or income for your family after your death.
If you already have a life insurance policy and want to change it, talk to your provider to see if you can update your existing policy. Then compare the costs with those of replacing it with a new one.
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With more than eight years’ experience in writing and sub-editing content, Karen started her career in fashion before making the move to insurance. She now specialises in producing clear, engaging content that helps people make better financial decisions.
Karen’s areas of expertise include insurance products, such as car insurance, travel insurance and life insurance, as well as utilities such as energy comparison.
Stephen Maunder is an experienced personal finance editor, having spent more than a decade working for consumer print and online titles. He won several industry awards for his personal finance features at Which?, before becoming Deputy Editor at Compare the Market.
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