Term vs Whole Life Insurance UK: Which One Do You Need? (2026)
Term vs Whole Life Insurance: Which One Do You Need?
When you start looking at life insurance, you'll quickly encounter two main types: term insurance and whole of life insurance. Insurance companies and advisers often push whole of life because the premiums (and their commissions) are higher.
But for the vast majority of families, term insurance is the smarter choice. Here's a plain English explanation of both, and how to decide which you actually need.
Table of Contents
- What is Term Life Insurance?
- What is Whole of Life Insurance?
- Side-by-Side Comparison
- Why Term is Usually Better for Families
- When Whole of Life Makes Sense
- Types of Term Insurance Explained
- How Much Each Type Costs
- FAQ
- Next Steps
What is Term Life Insurance? {#what-is-term-life-insurance}
Term life insurance covers you for a specific period - the "term." If you die during that term, your beneficiaries receive the payout. If you survive the term, the policy ends and you get nothing back.
Key Features
- Fixed term: Typically 10, 15, 20, 25, or 30 years
- Fixed premium: Monthly cost stays the same throughout
- Payout only on death during term: No death during term = no payout
- No cash value: You can't withdraw money or cash it in
- Affordable: Much cheaper than whole of life for equivalent cover
Types of Term Insurance
Level term: The payout stays the same throughout. Good for income replacement.
Decreasing term: The payout reduces over time. Good for repayment mortgages.
Increasing term: The payout grows (usually with inflation). Good for long-term protection.
Family income benefit: Pays a monthly income instead of lump sum. Good for salary replacement.
Example
Policy: £500,000 level term, 20-year term, age 35 Monthly premium: Approximately £25-35 What happens:
- If you die in year 8: Family receives £500,000
- If you die in year 19: Family receives £500,000
- If you survive to year 20: Policy ends, nothing paid out
What is Whole of Life Insurance? {#what-is-whole-of-life-insurance}
Whole of life insurance covers you for your entire life. Whenever you die, whether at 55 or 95, the policy pays out (as long as you've kept up the premiums).
Key Features
- Lifetime cover: Pays out whenever you die
- Guaranteed payout: You will eventually die, so it will eventually pay
- Higher premiums: Costs 5-10x more than term for same cover amount
- May build cash value: Some policies accumulate value you can access
- Premium structure varies: Some have fixed premiums, others increase
Types of Whole of Life
Balanced/standard: Premiums are reviewed periodically and may increase Maximum cover: Lower initial premiums but reviewed and likely to increase Guaranteed/fixed: Premiums fixed for life but highest initial cost Over 50s plans: Simplified acceptance, smaller payouts, no medical questions
Example
Policy: £100,000 whole of life, age 35 Monthly premium: Approximately £120-180 (guaranteed premiums) What happens:
- If you die at 55: Family receives £100,000
- If you die at 85: Family receives £100,000
- Premiums paid by age 85: £86,400-£129,600 (50 years x £144-216/month)
Note: You may pay more in premiums than the payout if you live to old age.
Side-by-Side Comparison {#side-by-side-comparison}
The Cost Difference is Dramatic
Let's compare like-for-like at age 35:
For £500,000 of cover:
- Term (25 years): ~£30/month = £9,000 total premiums
- Whole of life: ~£300/month = £90,000 over 25 years (and ongoing)
The difference: You could buy £500,000 of term insurance AND invest £270/month for 25 years. At 5% growth, that investment would be worth approximately £160,000.
Why Term is Usually Better for Families {#why-term-is-usually-better}
Reason 1: You Don't Need Lifetime Cover
Think about why you need life insurance:
- To replace income while children are dependent
- To pay off the mortgage
- To cover childcare costs
- To maintain family lifestyle
All of these needs have an end date. Once your children are adults and your mortgage is paid, you don't need as much cover. Term insurance matches this reality.
Reason 2: Better Value for Money
With term insurance, you get maximum cover during the years you actually need it.
£500,000 term insurance (25 years): ~£30/month £500,000 whole of life: ~£300/month
For the same monthly budget of £300, you could get:
- £5,000,000+ of term insurance, OR
- £500,000 of whole of life
Which gives your family better protection?
Reason 3: Invest the Difference
Take the money you save on premiums and invest it instead.
Scenario:
- Term insurance: £30/month
- Whole of life equivalent: £300/month
- Monthly saving: £270
£270/month invested over 25 years at 5% return: ~£160,000
At the end of 25 years, your term policy expires but you have £160,000 in investments. You're probably now mortgage-free with grown children, so your protection needs are lower anyway.
Reason 4: Simpler and More Transparent
Term insurance is straightforward:
- Fixed premium
- Fixed term
- Fixed payout
Whole of life can be confusing:
- Reviewable premiums may increase significantly
- Cash values are hard to predict
- Surrender values may be disappointing
- Policy structures vary widely
When Whole of Life Makes Sense {#when-whole-of-life-makes-sense}
Despite all the above, whole of life insurance does have legitimate uses:
1. Inheritance Tax Planning
If your estate is above the inheritance tax threshold (currently £325,000, or £500,000 with residence nil-rate band), your heirs may face a 40% tax bill. Whole of life insurance can provide funds to pay this tax.
How it works:
- Policy is written in trust
- Held outside your estate
- Pays out on death to cover IHT bill
- Beneficiaries receive full inheritance without selling assets
Who needs this: People with estates worth £1m+ who want to preserve assets for heirs.
2. Guaranteed Funeral Fund
If you want to guarantee money is available for funeral costs, whole of life (particularly over-50s plans) ensures a payout whenever you die.
Consideration: Average funeral cost is £6,000-7,000. You might pay more in premiums over a long life than the payout. A dedicated savings account might be more cost-effective.
3. Legacy or Charitable Giving
If you want to guarantee a gift to charity or family regardless of when you die, whole of life ensures this happens.
4. Wealthy Individuals with Complex Estate Planning
High-net-worth individuals may use whole of life as part of sophisticated tax and estate planning strategies, often combined with trusts.
Types of Term Insurance Explained {#types-of-term-insurance}
Level Term
Best for: Most families as primary life cover
The payout stays constant. If you buy £500,000 of cover, that's what your family gets whether you die in year 1 or year 19.
Decreasing Term
Best for: Covering repayment mortgages
The payout reduces roughly in line with your decreasing mortgage balance. Cheaper than level term because the insurance company's liability decreases over time.
Increasing Term
Best for: Protection against inflation over long terms
The payout (and usually premiums) increase each year, typically by RPI or a fixed percentage. Helps maintain the real value of cover over 20-30 years.
Family Income Benefit
Best for: Families who want regular income, not a lump sum
Instead of a single payout, your family receives a monthly or annual income from your death until the end of the policy term. Often more tax-efficient and easier for families to manage than a large lump sum.
How Much Each Type Costs {#how-much-each-type-costs}
Term Life Insurance (2026 Monthly Premiums)
Age 30, non-smoker, 20-year term:
| Cover Amount | Level Term | Decreasing Term |
|---|---|---|
| £250,000 | £10-14 | £7-10 |
| £500,000 | £18-24 | £12-16 |
| £750,000 | £26-34 | £17-22 |
| £1,000,000 | £34-44 | £22-28 |
Age 40, non-smoker, 20-year term:
| Cover Amount | Level Term | Decreasing Term |
|---|---|---|
| £250,000 | £18-26 | £12-18 |
| £500,000 | £34-46 | £22-30 |
| £750,000 | £50-68 | £32-44 |
| £1,000,000 | £65-88 | £42-56 |
Whole of Life Insurance (2026 Monthly Premiums)
Guaranteed premiums, no medical (over 50s plan):
| Cover Amount | Age 50 | Age 60 | Age 70 |
|---|---|---|---|
| £10,000 | £25-35 | £40-55 | £70-95 |
| £20,000 | £50-70 | £80-110 | £140-190 |
Full underwriting, guaranteed premiums:
| Cover Amount | Age 35 | Age 45 | Age 55 |
|---|---|---|---|
| £100,000 | £80-120 | £140-200 | £250-380 |
| £250,000 | £180-260 | £320-460 | £580-850 |
| £500,000 | £340-500 | £620-900 | £1,100-1,650 |
Frequently Asked Questions {#frequently-asked-questions}
Key Takeaways
- Term insurance is right for most families - It provides maximum protection when you need it most
- Whole of life is 5-10x more expensive - Only buy it if you have a specific need for lifetime cover
- Match your policy to your actual needs - Protection needs reduce as children grow and mortgage shrinks
- Consider "buy term and invest the difference" - Often the smartest financial strategy
- Whole of life has uses - Inheritance tax planning, guaranteed funeral funds, or specific legacy goals
- Put any policy in trust - Avoids inheritance tax and probate delays on the payout
Next Steps {#next-steps}
Last updated: January 2026. This guide is for informational purposes only and does not constitute financial advice. Insurance needs vary by individual circumstances.
Last updated: 11 January 2026