What is the Difference Between Whole and Term Life Insurance?

Whole of life and term life insurance are the two main types of life insurance available on the UK life insurance market, and both can be used to protect your loved ones financially should the worst happen. But what are the differences between them, and which one is right for you?

In this guide, we highlight the differences in detail so you can make an informed decision.

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What’s the difference between whole of life and term life insurance?

Whole of life insurance will pay out to your beneficiaries no matter when you die, so long as the premiums are paid in full each month. Term life insurance, on the other hand, will only pay out if you pass away during the policy term, for example, 25 years. If the policyholder outlives the term length, the policy will stop.


What are the pros and cons of both?

Whole of life and term life insurance could both prove to be excellent options depending on your needs and circumstances.

We explore the benefits and potential drawbacks of each insurance type below…

Whole of life advantages

A whole of life policy can provide a simple and effective way to ensure the financial security of your loved ones.

Some of the benefits of this insurance type are:

  • It lasts your entire life. As long as you pay your premiums each month, your beneficiaries will receive a payout after you pass away. Unlike a term life policy, you won’t have to worry about renewing the policy at the end of its term, which could also increase in cost depending on your age.
  • Provides extra security. A guaranteed payout can provide your beneficiaries with the reassurance and comfort they need to take care of themselves financially. When you pass away, they’ll be given a cash lump sum to pay off debts, cover living expenses, or anything else.
  • Investment options. Some whole of life policies can be investment-linked.
    There are three types of policies you can take out:
    • Non-profit: Where you agree to a payout amount when you pass away and pay fixed premiums each month
    • With-profit: Your monthly premiums are invested in stocks and shares, which could grow your money, depending on how well the stock market performs
    • Unit-linked: Your premiums are used to buy investments in a unit fund and will rise or fall depending on the stock market

Whole of life disadvantages

While there are some great benefits to taking out a whole of life policy, it’s also worth bearing in mind the potential drawbacks of this insurance type…

  • It’s more expensive
    Because a whole life policy guarantees a payout to your beneficiaries when you pass on, the premiums will most likely be higher than those of a term life policy. A combination of level premiums, fixed death benefits, and living benefits (for example, the option to take out a loan or receive dividends) can all add up.
  • Less flexibility
    Whole of life insurance offers less flexibility compared to other permanent policies as you do not have the power to increase or decrease your premium payments or death benefit amount.
  • Fixed-rate
    One benefit of whole of life insurance is that when you take out a whole of life policy, you agree to pay a fixed rate in exchange for a predetermined payout once you pass away. However, the downside is that the longer you pay, the more money you could be losing out.
    For example, if you pay a fixed rate of £15 per month over three years you would have paid £540 but still receive your predetermined payout. On the other hand, if you paid the same £15 over a 30 years, you would have spent £5,400 only for your beneficiaries to receive the exact same amount.
  • Cash value wait
    Some whole of life policies have a savings element where you can access a tax-free cash value which accumulates during your lifetime. The downside is that, as specific fees and commission payments will be prioritised, you may have to pay premiums for years before you can access these funds.

Term life advantages

Like whole of life, term life insurance can offer customers fixed premiums which don’t increase over time; this is called a ‘level term’ policy. However, you also have the option to reduce how much you pay out during the policy’s term without lowering your premium. This is called a ‘decreasing term’ policy.

Some other benefits of this policy include:

  • Temporary coverage
    It can be used as a financial safety net for people with a mortgage and a family to protect and is designed so that the policy expires when you no longer need it. For example, you may want to stop paying into a policy when your children have grown up and are financially independent.
    Most term life policies will offer term lengths of up to 40 years or up to age 70, though a handful will go further. The death benefit and the cost of premiums will usually remain the same for the duration of the term. Term life insurance only provides coverage for a set period and it only pays out if you die within the term. The policy has no other value than to provide these features.
    Once the policy expires, you can opt to renew it, go with a different provider, or choose to not pay for a term life policy.
  • Easy to digest policy
    A term life insurance policy can be very easy to understand (unlike other forms of permanent life insurance), especially with the help of an insurance expert, so there’s no hidden costs, exclusions or risks to worry about later. It also makes it easy to compare different policies.
  • Lower costs with maximum death benefit
    Term life insurance can provide the maximum death benefit available at the lowest cost. It can work out cheaper compared with whole of life cover as a payout from the insurer is not guaranteed, therefore your monthly premiums will be cheaper.

Term life disadvantages

While there are plenty of benefits to get excited about, it’s also worth noting the potential drawbacks as well.

  • Premiums increase
    When you take out a new term life insurance policy, your age and term length will impact how much it will cost, as it will be more expensive the older you get. For example, taking out a policy will be cheaper in your 20s or 30s compared to your 50s or 60s.
  • Uncertainty of later coverage
    While having a fixed term can provide greater flexibility, your age could make it more expensive or difficult to take out another policy later on.
  • No accumulation of capital
    Unlike a with-profit whole of life policy, term life insurance does not allow you to build up a cash value. While this generally makes your policy cheaper, you won’t have the option to take any money from your insurance policy if you need it at a later date.
    However, you may end up saving more overall on a term life insurance plan. To get a better understanding of the costs involved, speak with an insurance expert.

Which insurance type is the best overall?

The best insurance policy will be the one which suits your needs and circumstances. Deciding on which one is best for you is a personal decision and will depend on your lifestyle, situation and goals.

Those who want term life insurance typically need cover during a specific period in their lives, for example, the term of your mortgage. However, if you want to leave a legacy for your family when you die, whole life insurance may be more suitable.

Whole life cover is often used to pay inheritance tax (IHT): if you write your whole life policy in a trust, your beneficiaries will receive a cash lump sum that can be used to pay the IHT bill.

Bear in mind that the above scenarios are examples only, and no two people’s circumstances are the same. The right advice depends on your circumstances and there’s no ‘one size fits all’ rule. It’s therefore important to seek independent advice to ensure you get the correct information.


How can I compare the costs of each policy?

Like all types of insurance, the cost of either a whole of life or term life policy will depend on multiple factors, such as:

  • Age
  • Health
  • Medical history
  • Whether or not you smoke
  • Whether you are in a high-risk profession
  • How much cover you’d like to take out

While term life insurance is generally cheaper than whole life insurance, that doesn’t mean that you can’t get a great deal for either one. The independent financial advisors we work with can do this for you thanks to their whole-of-market access, meaning that they can find deals from a vast database of providers to find a policy that best suits you.


Speak to an expert

Insurance planning and tax planning is a complex area, so it’s important you consider taking specialist advice about which life insurance type would be best for you.

Our advisers are regulated by The Financial Conduct Authority and so you will be dealing with a highly trained person that adheres to strict rules of conduct.

An insurance advisor will know where to find the best offers, and how to ensure your cover is an exact fit for your needs. Call 0808 189 0463 or make an enquiry for a free, no-obligation chat with one of the expert financial advisors we work with.

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