How term life insurance works
With term cover, you pick an amount and a number of years. If you die during that time, the policy pays out. If you are still alive at the end, the cover stops and nothing is paid. That might sound like money wasted, but it is the same deal as home or car insurance: you pay for protection during the years you need it.
Term cover comes in three main forms. Level term keeps the payout the same throughout. Decreasing term reduces the payout over time, roughly in line with a repayment mortgage. Increasing term rises each year to help keep pace with the cost of living.
- Level term: the payout stays the same
- Decreasing term: the payout falls, often to match a mortgage
- Increasing term: the payout grows to offset rising prices
How whole of life insurance works
Whole of life insurance has no end date. As long as the premiums are paid, it pays out when you die, whether that is next year or in forty years. Because the insurer knows it will pay out at some point, premiums are much higher than term cover for the same amount.
Over 50s plans are a type of whole of life cover with a small fixed sum and few or no medical questions. Many pay back the premiums instead of the full sum if you die in the first year or two, and over a long life you could pay in more than the plan pays out.
When term cover makes more sense
Most protection needs have an end point. Your mortgage will be paid off one day, and your children will grow up and support themselves. Term cover lets you match protection to those years and stop paying once the need has passed.
For young families and homeowners, term cover usually gives the most protection for the money. You can combine policies, for example decreasing cover for the mortgage and level cover until your youngest child turns 21, to fit different needs without overpaying.
Term cover also leaves room in your budget for other protection. The money you save compared with whole of life could pay for critical illness cover or income protection, which help while you are alive and unable to work.
When whole of life earns its place
Whole of life cover suits needs that will exist whenever you die. The most common is inheritance tax. If your estate is likely to face a bill, a whole of life policy written in trust can give your family the money to pay it without selling the house or other assets.
Some people also use it to leave a gift to children or grandchildren, or to cover funeral costs. Because it costs more, it makes sense to be clear about the purpose and to check the premiums fit your budget well into retirement.
Couples planning for inheritance tax often look at a joint policy that pays out on the second death. That is usually the point when an estate faces the bill, because assets passing between spouses or civil partners are normally free of inheritance tax.
Guaranteed or reviewable premiums
With both types, you may be offered guaranteed or reviewable premiums. Guaranteed premiums stay the same for the life of the policy. Reviewable premiums start lower, but the insurer can raise them at set intervals, often every five or ten years.
For whole of life cover, this choice matters a great deal. A reviewable premium that rises sharply in your seventies can become hard to keep up, and stopping payments means losing the cover. Ask exactly how reviews work before you choose.
How Hi Tomorrow helps you pick the right type
We start with what you want the money to do. For a mortgage and young family, we compare term options across our panel. For inheritance tax planning, we look at whole of life cover and help you write it in trust. Sometimes a mix of both gives the best result.
We explain the costs and the trade-offs plainly, and we only recommend whole of life cover when a lasting need justifies the higher premium. For a large or complex estate, we may suggest you also speak to a solicitor or tax adviser.