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).

Like most insurance, when you take out a whole life policy plan you will be required to pay premiums (either annual or monthly). Furthermore, you'll be covered for a set amount of money that remains the same whether you die in 10 years or 50. When you die the money goes to your beneficiaries.

Term life insurance (also known as term assurance) you are covered for a certain period (hence the 'term' part). It can help to pay mortgage loans or support your family's living costs should you die during the policy term.

Understandably, term life insurance is cheaper than whole life insurance as you are only covering yourself for a specific time frame (i.e 20 years). Though whole life is more expensive, it provides your loved ones with much more peace of mind, as they know the cover will be in place until it is needed (as long as you keep paying the policy premiums), rather than for a certain amount of time.

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 has two main types:

Standard whole of life insurance - This is the version that Cavendish Online offers. This product has no investment value, you simply pick how much you would like to be assured for and pay your monthly premiums. This is the simplest form of whole life cover. Your premiums can be guaranteed or reviewable, so discuss your preference with an adviser first. 

Unit-linked whole life cover - This is an investment based product where part of your premium goes towards insuring your life, and part is invested. Unfortunately, Cavendish Online is not authorised to discuss this product with you.

Term life insurance has three types of plan:

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.

Whole of Life Insurance - Pros & Cons


  • Permanent coverage (so long as you keep paying monthly premiums).

  • Premiums stay the same throughout the coverage.

  • Guaranteed pay-out to your loved ones when you die.

  • Can withdraw cash value (Increasing over time).

  • Can be used for estate planning.


  • Higher premiums. 

  • Health questions are required (this can affect the cost of premiums & pay-outs.

  • No flexibility (cost of premium payments can't be changed).

  • You have to wait longer to withdraw cash value.

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 [1]).

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.

[1] 2021/2022 Tax Year. Source: https://www.gov.uk/inheritance-tax


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