With so many different types of life insurance out there it can be hard to know what you're looking for. But don't fret! We're going to take a look at two specific types & the most popular - whole and term life insurance. This guide aims to help you decide which one is best for you.
Both whole life and term life insurance can protect your loved ones if you pass away. Despite sounding similar, there are several differences between the pair, but to start, what are these types of insurance policies?
What are whole and term life insurance policies?
Whole and term life insurance provide different roles for your protection needs. Whole life insurance (also known as whole-of-life assurance) is a policy that ensures that your beneficiaries get a pay-out when you die. This policy lasts for as long as you pay your premiums (hence the 'whole' part).
Types of whole of life and term life insurance policies
With both whole of life and term life insurance cover, each is split up into different types of plans. Whole of life insurance can be found in two main types:
Balanced cover - (Also known as standard cover or non-profit whole of life) ensures that your policy premiums remain the same during your policy. One major benefit is that your policy will stay the same price from whenever you originally bought the policy regardless of any changes like age or health. Also, a fixed cash sum is paid out by your insurer when you die.
Maximum cover - (Or with-profits whole of life) This policy works so that your cover is linked to an investment fund. Your insurer will invest the income paid by your monthly payments. The goal of this is to see that the returns from the investment cover the eventual pay-out cost.
Premiums are reviewed, so if your investment is not working well, cover may be changed and the pay-out to your beneficiaries can be increased/lowered. These policies can be cheaper, to begin with, though premiums can rise over time.
There is also the option of Unit-linked cover - Similar to Maximum cover except you get to choose what investment funds you pay your monthly premiums.
Term life insurance has three elements of plan: Level term, increasing term & decreasing term.
Level term - This type will pay out a lump sum so long as you die within the agreed time length. The pay-out amount will stay the same during the policy.
Increasing term - The pay-out amount increases throughout the length of your policy to protect your policy from inflation.
Decreasing term - Opposite to increasing term, the pay-out decreases throughout the length of your policy. These policies can be used to help with financial circumstances such as debts, loans & mortgage repayments.
Before purchasing any type of life insurance, it's best to cover all possible routes, as they may be much better options for you with a different type of policy.
Have a family? Learn more about family income benefits.
Pros & Cons of Whole of life and Term Life Insurance
Like most life insurances policies, both whole of life and term life insurance have positives and negatives attached to them. These can have both short & long term effects on you and your loved ones. Before purchasing any type of life insurance, it's best to cover all possible routes, as they may be much better options for you with a different type of policy.
Term life insurance Pros & Cons
Temporary coverage - you aren't restricted to one provider.
Low cost and provides a maximum death benefit.
Easier to understand.
More flexible - you can end the policy when you want to.
Easier to compare with different policies.
Premiums can increase depending on your age.
Temporary coverage - you may need to take out more than one policy in your lifetime.
No cash value to build up.
Rarely used for estate planning.
Can whole of life and term life insurance be taxed?
For the most part, the pay-out of a life insurance policy is tax-free, so the beneficiaries wouldn't pay tax on the amount they receive. However, there are some circumstances in which the receivers of the pay-out may have to pay tax because of inheritance tax laws.
Inheritance tax depends on the total value of your assets (things you own such as properties, cars, jewellery - or things you own and can pass on to others). When passed on, they get counted as gifts and are taxable if they are above the inheritance tax threshold (£325,000 if single, £650,000 if married ).
Insurance pay-outs may be added to the value of your estate, exceeding the threshold. In this case, you would have to pay tax on the life insurance pay-out. It is a good idea to put your life insurance policy in a trust. This separates the pay-out from your estate, typically making it exempt from inheritance tax.
 2021/2022 Tax Year. Source: https://www.gov.uk/inheritance-tax