What Is Term Life Insurance?
Term life insurance is the simplest form of life cover: you pay a monthly premium, and if you die within the agreed term, your insurer pays out a lump sum (the "sum assured") to your beneficiaries. If the term ends and you're alive, the policy expires — no payout, no refund.
The term is typically aligned to your biggest financial obligations: a 25-year policy to cover a 25-year mortgage, or cover until your youngest child is 21. The purpose is pure protection, not investment.
Types of term life in the UK:
- Level term: The payout stays the same throughout the term. Best for interest-only mortgages or leaving a fixed lump sum for dependants.
- Decreasing term: The payout reduces over time (broadly in line with a repayment mortgage balance). Cheaper than level term. Often sold as "mortgage protection insurance."
- Increasing term: The payout rises each year (linked to RPI or a fixed %). Protects against inflation. More expensive.
- Family income benefit: Instead of a lump sum, pays a regular monthly income to your family for the remainder of the term. Often more useful than a lump sum for families covering living expenses.
For most people — particularly those with a mortgage and young children — a level or decreasing term policy is the appropriate, cost-effective choice. It covers exactly the period when your death would cause the greatest financial hardship to those who depend on you, at the lowest cost.
What Is Whole Life Insurance?
Whole of life insurance (called permanent life insurance in the US — whole life, universal life, variable life) covers you for your entire life, not just a fixed term. Because it's guaranteed to pay out eventually, it's significantly more expensive than term insurance.
Some whole life policies in the UK have an investment element — a portion of your premium is invested and builds a "surrender value" over time. This can be cashed in (surrendered) during your lifetime. US whole life policies typically build cash value that you can borrow against.
Whole life is primarily used for:
- Inheritance tax planning: A policy written in trust can provide funds to pay an IHT bill when the estate is settled, preventing heirs from having to sell assets.
- Guaranteed funeral costs: A small whole life policy to cover funeral expenses so the burden doesn't fall on family.
- Leaving a guaranteed legacy: Ensuring a specific amount reaches beneficiaries regardless of when you die.
Term vs Whole Life: Side-by-Side
| Factor | Term Life | Whole Life |
|---|---|---|
| Coverage period | Fixed term (10–40 years) | Entire lifetime |
| Payout guaranteed? | Only if death within term | Yes — guaranteed eventually |
| Monthly cost | Low (from ~£5–20/month) | High (often 5–15× more) |
| Cash value / investment | None | Some policies build cash value |
| Best for | Most people — mortgage, dependants | IHT planning, guaranteed legacy |
| Recommended by most IFAs? | Yes, for most situations | Only for specific use cases |
| Complexity | Simple and transparent | Can be complex |
How Much Does Life Insurance Cost?
Term life premiums are driven by age, health, smoking status, term length, and sum assured. Here's a rough guide for a UK non-smoker in good health:
| Age | Cover | Term | Approx Monthly Premium |
|---|---|---|---|
| 25 | £200,000 level term | 25 years | ~£7–12/month |
| 35 | £250,000 level term | 25 years | ~£12–20/month |
| 45 | £200,000 level term | 20 years | ~£25–45/month |
| 55 | £150,000 level term | 15 years | ~£55–90/month |
Smoking roughly doubles your premium. Pre-existing health conditions can add 25–200% loading or lead to specific exclusions. Whole life insurance for the same level of cover typically costs 5–15 times more.
Life insurance paid directly to your estate can form part of your taxable estate for Inheritance Tax purposes and may be delayed by probate. Writing your policy in trust is free, takes about 20 minutes, and means the payout goes directly to your beneficiaries quickly and outside your estate. Ask your insurer for a trust form when you take out the policy.
How Much Life Insurance Do You Need?
A common starting formula: 10× your annual income as a minimum, adjusted for:
- Outstanding mortgage balance (this is the minimum you should cover)
- Number of years until youngest child is independent
- Partner's ability to generate income if you died
- Any other debts you'd leave behind
- Funeral costs (typically £4,000–£10,000 in the UK)
Family income benefit policies (which pay a monthly income rather than a lump sum) are often more practical — a £2,000/month family income benefit for 20 years is easier to plan around than a £480,000 lump sum that a grieving family must manage.