Life insurance is a policy that covers you in case you die. The point of this kind of cover is to make sure the people you leave behind would be financially secure without you.

There are different types of life insurance to choose from. Which kind is right for you depends on what you’re trying to achieve by buying cover; what your loved ones would need if you were no longer here; and what you can afford (and are happy) to spend on being insured.

The most common type of cover bought is term life insurance, but whole life cover is also an option. Let’s take a look at both.

What is term life insurance?

Term life insurance is a policy that covers you in case you die within a set time frame (the policy term). It enables you to insure yourself only for the time that you really need cover – i.e. as long as you have financial liabilities or people who rely on your income.

When you take out term life cover, you choose how long you want to be insured. This is often a number of years or decades – e.g. 10, 20 or 30 years. You also choose an amount you want to be covered for, and whether or not the cover you buy will be level or decreasing.

How level term life insurance works

  • Pays out a lump sum if you die during your policy term
  • Covers you for a fixed policy term (e.g. 10, 20 or 30 years)
  • The amount paid out will always be the same, whenever you die
  • More expensive than decreasing term life insurance
  • Cheaper than whole life insurance

Level term life insurance covers you for a fixed policy term. If you die during that time, a lump sum will be paid out. The amount of that lump sum would always be the same throughout the life of your policy. So if you take out £200,000 of level term life cover, the amount paid out to your loved ones if you die would be £200,000. This would be the case whether you die near the beginning, middle or end of your level term policy.

People choose level term life insurance if they want to leave a set lump to their family. This could be because they know they’ll still have the same financial liabilities as when they took out the policy, or they simply want to leave that amount to make their loved ones financially comfortable.

How decreasing term life insurance works

  • Pays out a lump sum if you die during your policy term
  • Covers you for a fixed policy term (e.g. 10, 20 or 30 years)
  • The amount paid out will decrease over time
  • Cheaper than level term life insurance
  • Cheaper than whole life insurance

Decreasing term life insurance covers you for a fixed policy term. If you die during that time, a lump sum will be paid out. The amount of that lump sum will decrease throughout the life of your policy. So if you take out £200,000 of level term life cover, the amount paid out to your loved ones would become gradually less over time. They’d receive more if you die near the beginning of your policy than towards the end.

People choose decreasing term life insurance if their financial liabilities and their family’s financial needs will also reduce over time. Having a mortgage is an obvious example, as the outstanding balance reduces over time. Having kids is another – who’ll eventually become financially independent and won’t need as much parental financial support.

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What is whole life insurance?

Whole life insurance is a policy that covers you for as long as you live. It will pay out a lump sum if you die, whenever that is. This kind of cover guarantees that a lump sum will be left to your loved ones whenever you die.

When you take out whole life insurance, you don’t have to choose a policy term – because you’ll always be insured. But you can choose whether to buy guaranteed or investment-linked cover.

How balanced whole life cover works

  • Pays out a lump sum if you die
  • The amount paid out always stays the same
  • Your monthly premiums always stay the same
  • Usually more expensive than term life cover

Balanced whole life cover is similar to level term life cover in the sense that you pay monthly premiums in return for a fixed lump sum if you die. The difference is that you’re insured for your whole life and the policy will pay out if and when you die (not only if you die during your policy term).

How investment-linked whole life cover works

  • Pays out a lump sum if you die
  • The premiums you pay are invested
  • If the investments do well, the payout amount could increase
  • If the investments don’t do well, the payout amount could decrease
  • Your premiums are also subject to change (and could get more expensive)
  • You can choose to cash out your investments before you die

Investment-linked whole of life insurance is very different to balanced cover or term life cover. The amount paid out and the premiums you pay are variable, depending on the success of the investments – and you can also choose to cash this policy out (which isn’t the case with other types of life insurance). People who take out investment-linked cover tend to have a higher appetite for risk.

Should I buy term life or whole life insurance?

It depends on your circumstances, but for most people: term life insurance is a perfectly adequate cover option. Often, your family’s financial reliance on you will reduce or diminish with time. What they’d need if you died tomorrow is usually different to what they’d need in 10 years time, and even more different than if you died in 20 or 30 years time.

Term life insurance enables you to protect your family financially for the time that they need it – helping them to pay off a mortgage, pay for your funeral, keep up with the cost of life, or support your children until they reach financial independence. It also makes sure you don’t spend any more on life insurance than you really need to.

Whole of life insurance is suitable if you know your family’s financial needs without you will never reduce or go away entirely. Or if you decide you always want to leave a lump sum to your family if you die, whenever that is – and you’re happy to spend a bit more on being covered.

Can I get money back on term life or whole life insurance?

No – you can’t get money back on most life insurance polices. Like any other insurance policy, you pay monthly premiums to be insured, and only get a payout if the worst happens and a claim needs to be made (in this case: if you die).

The only type of life insurance you might be able to cash out are investment-linked whole-of-life policies. Most people don’t opt for this kind of life insurance as it’s much higher risk than other types of policy.

Can I cancel my term life or whole life insurance?

You can cancel your life insurance policy at any point. There’s a few things to know about cancelling your life insurance:

  • Most policies have a 30-day ‘cooling off’ period; if you cancel within this time, you should be refunded the first premium you paid
  • If you cancel your life insurance later than the first 30 days, you won’t be refunded any premiums (no matter how long you’ve been paying them)
  • You may be charged a surrender value if you cancel an investment-linked whole life policy
Is term life or whole life insurance right for you? Let's work it out, starting with your age:
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  • Term life insurance covers you if you die within a set policy term
  • Term life insurance is ideal if you only need cover for a certain amount of time
  • Whole life insurance covers you if you die, whenever that is (you're insured for your whole life)
  • Whole life insurance is ideal if you know you'll always have financial liabilities or always want to leave a lump sum to your family
  • Term life insurance is cheaper than whole life insurance

This post is intended for informative purposes only and does not constitute advice.