Term or whole of life insurance?

Term life insurance covers you for a fixed number of years and pays out a lump sum only if you die within that period. Whole of life insurance has no end date: it runs for as long as you live and pay the premiums, and it always pays out. That single difference explains almost everything else about the two products, including why whole of life costs more.

The cost gap is the practical question most people are weighing up. Term cover is one of the cheapest options on the market because a payout is not guaranteed¹. Whole of life premiums are higher because the payout is². As a worked example, a 35-year-old non-smoker taking £300,000 of level term cover over 34 years would pay £17.78 a month, or £7,254.24 in total; a smoker of the same age would pay £31.97 a month, or £13,043.76 in total³.

Neither product is a savings plan in the ordinary sense. Term cover has no cash-in value at all, and if you outlive the term the policy simply ends without a payout¹. Some whole of life policies do build a surrender value, but it is often less than the premiums paid⁵.

Term cover ends on a set date, whole of life never does

Term life insurance is life insurance with a start and an end date⁸. You choose the term, and cover applies only while the policy is active⁹. Some insurers offer cover stretching from five years all the way up to 70 years¹. You can set the plan for any number of years, such as 15, 20 or 30, or until a certain age such as 40, 50 or 60¹. One provider lets you choose a term from 5 to 50 years¹⁰.

Whole of life insurance does not have a policy term¹¹. There is no set term because the policy can run for as long as you are alive and paying the premiums¹². It pays out an agreed amount whenever you die, provided you have continued paying the premium, and some policies stop taking money when you reach 90⁶. It is sometimes called life assurance¹³.

The practical consequence is what happens at the end. If you outlive a term policy, it simply ends without a payout⁴. If you outlive a whole of life policy, that is the point: the payout is guaranteed so long as you are up to date with your payments¹⁴.

Whole of life costs more because a payout is guaranteed

Every source in this comparison agrees on the direction of the cost difference. Whole of life policies tend to be more expensive than term policies¹⁵. Because the policy ensures a guaranteed payout, the premiums are more expensive than term life insurance policies². It is usually much more expensive than term life insurance because it always pays out¹⁶. Term life insurance is one of the cheapest options on the market because a payout is not guaranteed¹.

The reason is straightforward. With term cover, the insurer pays out only if you die within the term, so many policies never result in a claim. With whole of life cover, a claim is certain eventually, so the premium has to fund it. Whole life insurance is a life insurance plan with no end date, covering you from the moment the plan starts to the end of your life⁸.

Level term cover sits between the two on price. It is generally a little bit more expensive than decreasing term insurance and cheaper than whole life insurance¹⁷. It is usually more expensive than decreasing life insurance and does not go up with inflation¹⁸.

Premiums on term policies are fixed for the duration of the term for most term life insurance policies¹. On whole of life, you must continue to pay the premiums until the end of the term or until you are 90, sometimes called life assurance².

What happens if you outlive the term or stop paying

Outliving a term policy is not a failure of the product; it is the expected outcome for most policyholders. If you do not die during the term, the policy does not pay out the death benefit and the premiums you have paid are not returned¹. The policy has no cash-in value so you get nothing back¹. With term life insurance, if you die before the end of your policy your beneficiaries receive a lump sum; if the policy is outlived it expires with no cover and no refund of premiums¹⁹.

Stopping payments is a different matter. Failure to keep up monthly payments will likely result in the policy being cancelled and your cover being removed¹⁷. On a joint policy, only a single payment is made per policy, even if both policyholders die during the term⁶.

Whole of life behaves differently if you stop paying. Some of the plan's value typically remains if you stop paying, but it is far lower than the original cover and can reduce over time²⁰. Only certain whole of life policies have a surrender value: if you cancel before the cut-off age of 90 you may receive a payment based on fund performance, often less than the premiums paid⁵. The insurance products offered by Cavendish Online have no cash-in value at any time².

Level, decreasing, single or joint: how term cover is set up

Term cover comes in several shapes, and the shape you choose affects both the price and whether the payout matches what you owe.

Level term life insurance is a term policy where the sum assured stays the same over the lifetime of the policy, available as a single or joint policy⁸. Level term policies pay out the same amount if you die at any point during the term². Decreasing term means the amount paid out decreases over the life of the policy, usually to match a decreasing debt such as a repayment mortgage²².

A joint plan covers two people and would usually pay out upon the first person passing away¹. The main disadvantage of joint life insurance is that you get only the single payment per policy, even if the worst happens to both policyholders during the term⁶.

Premium reviews on whole of life: when your price can change

Whole of life premiums are typically higher than term policies²³. Some policies get reviewed after a set time, usually 10 years¹¹. That review is the point at which the price you pay can change, which is why the terms of a whole of life plan matter as much as the headline premium.

Term premiums behave differently. For most term life insurance policies, premiums are fixed for the duration of the term¹. You pay a set amount every month for the insurance during the policy's term¹.

There is a middle option worth knowing about. Renewable term life insurance bypasses medical underwriting at renewal, but the renewed premium will be based on your increased age at that point¹. Customers pay an increased premium from the outset for the ability to renew for another term at the end¹.

Converting, renewing or extending term cover

Some term life insurance policies may allow you to convert to a whole life policy within a specific timeframe or before a certain age, likely with higher premiums¹. Convertible term assurance lets you switch to endowment or whole life policies with up to the same amount of cover, depending on the products your provider offers²⁴.

Extending or increasing cover depends on the plan. You can only increase the cover or extend the term on a Standard Life plan if the plan allows it, so it is worth checking the policy documentation or calling the provider²⁵.

If you are considering a switch, the timing matters. Converting later means the insurer prices you at your age at that point, not the age you were when you took out the original policy.

What each type is usually used for: a mortgage, family or inheritance tax

Term cover is commonly used to protect a mortgage. The term is set to the same as the mortgage, say 25 years, and the sum insured should match the amount borrowed²⁶. Mortgage protection life insurance works the same way: the length of cover, or term, is the same as your mortgage, 30 years for example, and the sum matches how much you have borrowed²⁷.

Term cover is also used more broadly to pay off debts such as a mortgage and provide money for your family¹¹. There are three types of life insurance: term life insurance, whole-of-life insurance and family income benefit insurance²³.

Whole of life is often used where a payout is certain to be needed at an unknown date. One of the main benefits is that it can help your family deal with bills associated with inheritance tax, leave some form of inheritance to loved ones, or help with funeral costs¹³. Some high-net-worth individuals take out life insurance to cover the inheritance tax the family will have to pay on their estate²⁶.

The tax treatment is the same for both in one respect: life insurance does not incur tax, but the payout would be added to the value of your estate and may then be subject to inheritance tax²¹. Writing a whole-of-life policy into trust means the eventual payout does not form part of your estate for tax purposes²¹. A life insurance trust is handled separately from your actual estate and so is not subject to inheritance tax if your estate is valued above the tax threshold²³.

Health questions, exclusions and cancelling a policy

Applicants are asked questions about current and past health. Disclosure of a medical condition may affect the price or your ability to buy cover, and failure to disclose may affect a claim¹. Failure to disclose the necessary information may impact a claim later on, so the best rule of thumb is to be open and honest¹.

Cost depends on age, health, occupation, dangerous hobbies, length of cover and amount of cover¹. You can still access level term, decreasing term, increasing term or whole-of-life cover with a pre-existing condition, though specialist non-medically screened policies may limit the term length or the total sum insured²².

Life insurance policies do not have standard wordings. Some have exclusions, or make claiming harder if you develop a terminal illness²⁶. Terminal illness benefit is not included in all policies, so it is worth checking your documents²². Many whole of life insurers have a suicide clause, meaning they will not pay out if the policyholder dies by suicide within the first 12 or 24 months, and restrictions may apply to high-risk activities²⁸.

Cancelling is straightforward in the early days. Term life insurance usually comes with a 30-day cooling-off period, where you would be refunded any premiums paid so far¹. The right to cancel, or a substitute right to withdraw, applies to the entire arrangement²⁹.

Where protection stops

Term life insurance and critical illness insurance claims are covered by the Financial Services Compensation Scheme. You get 100% if the firm failed on or after 3 July 2015, and 90% if it failed before⁷.

Claims do not always move quickly. Average processing times reported for term insurance claims run from 53 to 122 days, and whole of life insurance claims average 53 days³¹.

If you have a complaint about a life insurance policy that the firm has not resolved, the Financial Ombudsman Service can look at it. Free, impartial help on protection and debt questions is available from MoneyHelper and from debt advice charities.