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Which life insurance policy is right for you?

Taking out life insurance helps your loved ones to be looked after financially if you die, or are diagnosed with a terminal illness, and there are several types of policy to choose from.

GoCompare author
Updated 18 November 2021  | 3 mins read

Life insurance cover types

Life insurance pays out tax-free money to your loved ones when you die. To suit different needs, policies vary in how much they’ll payout and the period you’ll be covered for.

Generally, there are two main types of life insurance:

Term assurance

With this type of policy, you choose the term - for example, to last the length of your mortgage or while your children are in full-time education - as well as the payout amount.

If you die during your policy’s term, your loved ones will receive a lump sum. This amount stays the same at whatever stage a claim is made during the term.

Whole of life cover

As the name suggests, this type of policy will pay out whenever you die, as long as you’ve kept up with your premium payments.

Because there’s a guaranteed payout when you die, whole of life policies are usually more expensive than term assurance policies.

Key points

  • There are two main types of life insurance: term assurance and whole of life
  • When you take out a policy, you’ll need to decide how much and how long you’ll need cover
  • Life insurance can be used to cover a debt, like a mortgage, or a certain period of time when your family will need the most financial support
  • The tax-free payout can be paid as a lump sum or received as a regular income
  • Whole of life cover guarantees a payout but will be more expensive

How long do you need cover for?

There are a few questions you need to ask yourself, to help you find the right policy.

The first of these is to decide how long you want to be insured for, as different types of policies suit different timeframes:

Cover until you die

If you want the reassurance that your family and loved ones will receive a payout no matter when you die, you’ll need to take out whole of life insurance.

With whole of life balanced cover, the premiums you pay and the payout your loved ones will receive stay the same.

Or you can choose maximum cover, which includes an investment element, where some of your money is put into an investment fund.

If your investments do well, this can add to the lump sum payout. But if they under perform your whole of life premiums may be increased to make up the shortfall.

Cover while you have a mortgage

For people with large debts to pay off over time, like mortgages, decreasing term policies can be a good option.

With this type of cover, the amount of payout your family would receive reduces in line with how much is needed to pay off your outstanding mortgage.

Even if you pay off your mortgage early, and you die afterwards but before your policy term ends, your cover will still pay out the money as stated in your policy document.

Cover when you’re older

If you want to take out cover when you’re older, you can buy a particular type of life cover called over-50s life insurance.

These policies are specifically designed to meet the needs of people aged between 50 and 80. What’s more, they don’t require any medical checks when you take out the policy.

This cover will pay out a fixed lump sum when you die and can help to cover your funeral costs and other bills your family may have to pay.

What kind of payout do you need?

When you’re taking out your life insurance policy, you’ll need to decide the best way for your loved ones to receive the payout, if you should die during the term.

Depending on the type of cover you take out, you can choose whether your beneficiaries receive a lump sum or will be paid a regular income until the policy’s expiry date.

Which payout type is better for you?

The different payout methods offer different benefits, so you’ll need to decide which option will work best for your family.

Receiving a lump sum will give your beneficiaries full control over the money and can provide some flexibility. But receiving such a large sum might be overwhelming.

Alternatively, regular payments can help your loved ones to budget. It can also help the money to last longer, by preventing it from being spent too quickly.

Typically, the younger your beneficiaries are, the more useful receiving a lump sum will be - providing flexibility as their financial needs change over time.

What if I become seriously ill during my life insurance term?

Many life insurance policies include terminal illness cover, which could pay out if you’re diagnosed with a terminal illness during your policy’s term.

For serious health conditions that aren’t terminal, but may prevent you from working or paying your mortgage, you can help minimise the financial impact by taking out critical illness cover.

This will cover you if you’re diagnosed with specific illnesses set out in your policy.

Critical illness cover can be bought as an add-on to your life insurance, or as a stand alone policy to run alongside your life cover.

Pros and cons of each life insurance policy type

Level term life insurance

Pros

  • You’ll know how much the payout will be - it won’t decrease over time
  • Your family will receive a lump sum when you die
  • Your premiums will stay the same throughout the policy term

Cons

  • The payout won’t increase with inflation, so might be worth much less towards the end of the policy term
  • It’s usually more expensive than decreasing term insurance
  • There won’t be a payout if you die outside of the term

Decreasing term life insurance

Pros

  • This cover is usually cheaper to buy than level-term cover
  • It’s useful for repaying a mortgage so your loved ones won’t lose their home if you die

Cons

  • The payout value decreases over time
  • Typically only covers the mortgage and won’t leave enough to cover other expenses
  • Won’t be useful for interest-only mortgages because it wouldn’t cover the balance to be paid off

Over-50s life insurance

Pros

  • Acceptance is guaranteed, you won’t need a medical
  • It can help you to provide some inheritance
  • You can use it to leave money to pay for your funeral or other bills

Cons

  • Offers smaller payouts than other types of life insurance
  • If you live for a long time you could end up paying in more than it will pay out
  • It’s only available as a level term policy

Whole of life cover

Pros

  • Guarantees a payout when you die
  • It can be used to pay the inheritance tax on your estate
  • If you write your policy into trust, the payout won’t be eligible for inheritance tax
  • Some policies let you cash in early to receive a lower payout before you die

Cons

  • Much more expensive premiums than term life insurance
  • The money you spend on insurance will buy you a lower death benefit than with a term policy
  • Your premiums may go up over time if your investments under perform

Critical illness cover

Pros

  • It can help you financially if you find yourself unable to work due to serious illness
  • It can provide you with peace of mind if you don’t have many savings
  • The payout can be used to help you pay off your debts while you’re unwell

Cons

  • Only specific illnesses and conditions are covered
  • The premiums can be high and you won’t get your money back if you never make a claim

What if my circumstances change and I need to change my policy type?

It’s worth reviewing your life insurance regularly in case you need to update your cover.

For example, your family may increase in number or you might move to somewhere with a larger mortgage that needs to be covered.

You may even pay off your mortgage early and choose to decrease the value of your policy.

If you need to alter your life insurance amount, or change the terms of your policy, you can either arrange this with your existing provider or buy additional life insurance.

It’s also possible to switch insurance providers to find a better deal.

Still need help choosing the right cover type?

If you want help in deciding what cover you need and how much life insurance might be right for you, try using our life insurance calculator.