Different types of life insurance

When thinking about life insurance it’s important to understand all your options, starting with the type of life insurance you need. There are different types of policies available, so you need to think carefully about the best one for your situation.  

Our simple guide explains the difference between the three main types of life insurance, as well as other types of financial protection you may want to consider for you and your family.

When thinking about life insurance it’s important to understand all your options, starting with the type of life insurance you need. There are different types of policies available, so you need to think carefully about the best one for your situation.  

Our simple guide explains the difference between the three main types of life insurance, as well as other types of financial protection you may want to consider for you and your family.

Mubina Pirmohamed
Insurance expert
3
minute read
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Last Updated 1 NOVEMBER 2022

What is life insurance?

Life insurance is designed to pay out money to your chosen beneficiaries - for example your partner or children - if you die within the policy term.

Depending on the type of life insurance policy you take out, you can choose a single lump sum or regular payments to be made to your family after your death.

Life insurance essentially means you’ll have the reassurance that the people you love are financially protected after you die.

Types of life insurance

Types of UK life insurance, at a glance: 

  • Term life insurance – a policy that runs for a specific amount of time  
  • Whole of life insurance – this offers a guaranteed pay-out, no matter when you die 
  • Joint life insurance – a combined policy for you and your partner that only pays out once when the first person dies 
  • Over 50s life insurance – a whole of life policy specifically designed for people over the age of 50 
  • Death in service cover – an employee benefit that pays out a lump sum should you die while employed by the same company 
  • Critical illness cover – can be added as an extra to your life insurance policy, offering a pay-out should you be diagnosed with a critical illness or injury. 

What are the main types of life insurance?

The three main types of life insurance policy to choose from are: 

Level term life insurance - Usually the most simple and affordable option, level term life insurance offers a fixed amount of money, covering you over a fixed period of time that you pre-select.  If you die within the chosen time period, known as the ‘term’, the policy pays out a lump sum to your beneficiaries. This is useful if you want to leave your dependants money so that they can continue to meet debts such as bills, childcare costs, or an interest-only mortgage.

This type of life insurance gives you the certainty of knowing exactly how much the pay-out will be. However, it 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, this type of life insurance cover won’t usually pay out.

Decreasing term cover - Decreasing term insurance is another type of fixed-term policy aimed at people whose financial commitments reduce over time - for example, if you’re repaying a mortgage. Decreasing term means the amount of money needed after you die to cover the mortgage will decrease as your mortgage decreases.  

This type of life insurance policy is usually designed to last as long as your mortgage does. So, as you pay off your mortgage and the outstanding balance decreases over time, so will the potential pay-out of your policy.  

Learn more about life insurance and mortgages

Whole of life insurance - Whole of life insurance, also known as ‘life assurance’, is a  policy that lasts for the rest of your life and always pays out if you die (as long as you’re kept up with monthly payments). They’re often used to offset inheritance tax payments. This type of life insurance could offer you certainty that there’ll be a financial payment to your family. However, because the pay-out is guaranteed, they’re typically more expensive than other types of life insurance like decreasing term cover.

What other types of life insurance cover are there?

There’s a wide range of other types of life insurance policies to shop around for. The most suitable one for you will depend on your individual circumstances. Here are some that you should consider: 

  • Critical illness cover - Designed to provide security if you fall seriously ill or become disabled, critical illness cover pays a tax-free, one-off payment to help pay off a mortgage or make amends to your home to live comfortably.  
  • Joint life insurance - Suitable for married couples, or those in a civil partnership, joint life cover is a type of life insurance policy that covers two people, but only pays out once. With joint life cover, you secure the future of the survivor, no matter which of you dies first.  
  • Family income cover - If you’re the primary earner or sole income in your home, you may want to consider income protection insurance. Income protection cover supports you and your family if you suddenly become unable to work, perhaps through illness or redundancy. Offering a tax-free alternative income, this policy allows you to continue paying your monthly outgoings.  
  • Over 50s life insurance - Secure the future of your close relatives by taking out an over 50s life insurance policy. This type of policy is popular because you’re guaranteed to be accepted, regardless of your health and lifestyle.  
  • Death in service cover - Sometimes offered as a company benefit through your employer, death in service cover provides a lump sum that could be up to five times your annual salary. You must be on the company’s payroll to qualify for this type of life insurance.

How do life insurance policies work?

Life insurance policies all work in a similar way, in that they pay out to your beneficiaries if you die during the term of the policy. How long you want the policy to last for depends on the type of life insurance you choose – it can be for a set number of years, up until retirement, for as long as your mortgage lasts, or for the rest of your life.  

When you take out life insurance, you’ll want to consider: 

  • The cover amount – how much would your family need to cover their outgoings when you’re no longer around 
  • How long you want the policy to last 
  • Whether you want a policy just for you, separate policies for you and your partner, or a joint policy together. 

As a first step, use our life insurance calculator to work out the minimum amount cover you’ll need to ensure your loved ones are financially protected.

What is the best life insurance?

The best life insurance policy depends on your individual circumstances and needs.  

Level term – best if you want the certainty of knowing exactly how much your family will get if you die during the term of the policy. 

Decreasing term – best if you want a policy that decreases in line with your mortgage, or financial support for your children that decreases as they get older and more financially independent. 

Whole of life – best if you want the certainty of a guaranteed pay-out and you don’t want the hassle of taking out another term policy as you get older. 

What type of life insurance pay-out should I choose?

Most life insurance policies pay out a lump sum of money when you die. But if you don’t make any special arrangements, the pay-out could be counted as part of your estate. This means it could be used to pay inheritance tax and any outstanding debts you leave behind. If you want more control over who the money to 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 pay-out from your policy separate from your estate. This means it can’t be touched by the taxman. 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 pay-out sooner. The beneficiaries can be anyone of your choosing – this could be 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 kids are older.

Need more help on choosing the right type of life insurance for you? 

With so many policies to choose from, deciding on the best type of life insurance for you can be pretty overwhelming. To make things easier, our partners LifeSearch offer expert and friendly advice to help you find the right type of life insurance for your circumstances.

The experts at LifeSearch can help make life insurance less complicated. Give them a call on freephone 0800 072 1147 today.

Where can I compare life insurance?

Having a life insurance policy offers you peace of mind that if you were to pass away, you’ll be leaving your dependants with adequate financial support. We’re here to make comparing life insurance cover as quick and simple as it can be.

Frequently asked questions

What affects the cost of life insurance?

As well as the level of cover you want and how long you’d like it to last – your age, family health history and lifestyle will all be taken into account when your monthly premium is calculated. The cost of your premium can also depend on the type of life insurance you take out.

Which type of life insurance is the cheapest?

When it comes to policy types, term life insurance tends to be the most affordable option, especially decreasing term, which goes down in line with your mortgage payments. Family income benefit has a lower pay-out, so it can also work out cheaper than a standard life insurance policy.  

Because there’s a guaranteed pay-out whenever you die, whole of life policies are usually the most expensive type of life cover.

When should I get life insurance?

There’s no such thing as the ‘right’ age to get life insurance. People tend to think about life insurance after moving house, getting married or having a baby. But ideally, the sooner the better, as you’re more likely to be offered a lower monthly premium if you’re younger and healthier.

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 hold. However, it’s often better to have a single policy that you can tailor to your needs – it’ll be cheaper too. Life insurance policies are usually easy to amend, so you might want to change an existing policy rather than take out a new one.  

That said, there are times when it’s worth having different types of life insurance to cover different situations. For example, you might want a policy to cover your mortgage term, and another as a lump sum or income for your family.

Find out more about holding multiple life insurance policies.

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