Term life insurance vs. whole of life insurance
If you’re new to the world of life insurance, knowing more about these two types of policies and what the difference between them is, could really help on your quest to find the right cover for you and your loved ones.
What is term life insurance?
Let’s start with the basics; what is term life insurance and how does it work?
This is one of the most popular types of life insurance, and for good reason too. Not only is it one of the most simple forms of life insurance but it can also be tailored to fit your needs and circumstances.
You can choose from more than one type of term
Stick with us, this sounds complicated but we promise it’s not - there are three different types of term insurance:
- Increasing term - An increasing life insurance policy is one of the most popular types of term insurance. If you choose this option, it means you’ll have an index-linked life insurance policy. Put simply, this means that the amount you're covered for can increase roughly each year to help mitigate the effects that inflation can have on your pay-out.
- Decreasing term - If you have a decreasing life insurance policy, your pay-out will reduce over the course of your term. This type of life insurance is often chosen to cover your mortgage, meaning as the balance of your mortgage reduces over time - so will your cover. This is also the reason why the monthly cost for this sort of policy is often lower.
- Level term - This type of term life insurance would ensure that the amount you’re covered for stays level throughout the duration of your policy. So unlike the above types of cover, your tax free lump sum will not increase or decrease over the duration of your term.
What is whole of life insurance?
There’s a big clue in the name with this one but this is a life insurance policy that covers you for the whole of your life. So from the moment you take out your policy, you’ll be covered for the rest of your life and your cover will pay out in the event of your death (this is sometimes called a death benefit).
Put simply, the main difference between a term life insurance policy and a whole of life insurance policy is the time length that you’ll be covered for.
What are the pros and cons of having a whole of life policy in place?
With a whole of life insurance policy in place, you and your loved ones can have peace of mind knowing that a pay-out is guaranteed.
One of the only cons of having a whole of life policy can be the cost. This is down to the fact that the policy is guaranteed to pay-out, so with that in mind, the cost for this type of cover can sometimes be expensive (depending on what age you get your cover).
However, the monthly cost of your whole of life insurance policy will stay the same throughout the duration of your cover. Unless you add indexation, in which case, your cover amount will increase in line with inflation each year.
Term life insurance advantages and disadvantages
One of the main advantages of choosing a term life insurance policy is that this cover is more often a lot more budget friendly than a whole of life insurance policy.
Another pro of having term life insurance is, you will typically be able to have the choice of a wider range of life insurance companies. The main advantage of a term life insurance policy is that you can have a relatively large amount of coverage for a decent price.
One of the only disadvantages of term life insurance is that it does end (eventually). So how it works is, you’ll be covered for a set amount of time and when this time is up, your cover will cease to exist.
What can the pay-out from a term life insurance be used for?
If you have children, having this type of financial protection in place can ensure that your children will be financially looked after, if the worst happened to you during the term of your policy. The pay-out from a term life insurance policy can be used for:
- Pay off your mortgage
- Contribute towards general living costs
- Pay off any large remaining debts you pay leave behind
- Cover funeral costs
Who needs to take out a whole of life policy?
A whole of life insurance policy is the ideal life insurance policy for those who want the guarantee that their cover will pay-out one day. This policy is great for those with adult children who are no longer financially dependent on them.
The pay-out from a whole of life insurance policy is typically used to pay for the policyholder's funeral costs or used to be left as a nest egg for loved ones. However, the money can be used in whatever way your loved ones want.
Another type of policy could be more suited to you
Life insurance is a broad spectrum, there are so many different types and knowing which is the right one for you and your loved ones can feel difficult.
But there are so so many more types of cover to choose from than just term life insurance and whole of life insurance, some of the other popular types of life insurance you could choose from are:
- Income protection insurance
- Critical illness cover
- Mortgage protection
When is the best time to take out either of these life insurance policies?
In general, the younger you are, the cheaper your life insurance policy tends to be. Apart from your age, the price of your life insurance policy is based on several other different factors. A few examples of these are:
- Your overall health
- How long your term length is
- Whether your smoke or not
- The amount of cover you need
- The life insurance provider you choose
- Your family’s medical history
But bear in mind, everyone’s policy price will be different as it is based on your unique health and lifestyle disclosures.
How do you know which life insurance policy is best for you?
The best way to find out what cover might be most suited to you and your family is with expert advice (not to blow our own trumpet but this is what we do best), we have over 200 years combined experience in the life insurance industry so we definitely know what we’re talking about.
At Busy Bee, we look at your circumstances, needs and affordability so that we can find the cover that’s right for you. We do the work so you don’t need to and search through the UK’s leading life insurance providers to find the insurer that aligns with your unique circumstances. Click the button below to kick-start your life insurance journey today!