In this article, I’m going to be looking at the differences between Whole Of Life Insurance vs Term Life Insurance. Which is better? Which is cheaper? And which one should you choose?
As you will have already guessed from the title of this article there are two main types of Life Insurance….
Term Life Insurance and Whole Of Life Insurance
What is Term Life Insurance?
This type of Life Insurance policy covers you for a certain time period and is designed to protect your family by paying out a lump sum of money should you die prematurely. If you die within the term of your policy, your family will receive the pay out. If you don’t, the policy comes to an end once that agreed time period is up.
When you buy your Term Life Insurance policy you choose the length of the ‘term’; this is usually 20, 30, or 40 years etc.
Your monthly premium will stay the same throughout the length of the term, and is cheaper than Whole Of Life Insurance.
So, what Are The Pros And Cons?
Well, let’s look at the advantages of this type of policy first:
- The premiums are lower, making it more affordable and best suited to provide money for life situations that have a time period, such as repaying a mortgage.
- If you have young children you can set the term of your policy to ensure that if you died while they were still dependent on your income they would be taken care of financially.
- Once your children have grown up and wouldn’t need to rely on your financial support you could always convert your Term Insurance policy to a Whole of Life Insurance policy.
And the downsides?….
- The policy doesn’t offer any living benefits, it only pays out if you die. There are no extra benefits such as a savings feature with a Term Life Insurance policy unlike a Whole Of Life Insurance policy that can have a cash value which you can access before you die. Although these are rare on modern day Whole Of Life policies and we would recommend you speak to an investment broker before deciding to take a WOL policy like this.
- Your policy ends when the term ends, so you would have to start a new policy, which will mean renewing with higher premiums due to you being older or your health having changed.
What Is Whole Of Life Insurance?
Whole Of Life Insurance is a type of Permanent Insurance and provides lifelong cover. Your monthly premiums will be more expensive than if you had taken out a Term Life Insurance policy, mostly because the insurance company knows that they will have to pay out at some point, whereas you could outlive the length of your Term Insurance policy.
One of the benefits of Whole Of Life Insurance is that it can help your family with inheritance tax. An inheritance tax bill needs to be paid BEFORE your loved ones can access your estate, which often results in relatives needing to take out a loan or use their own savings to cover the bill. A Whole Of Life Insurance policy can provide enough to pay the inheritance tax bill, and can also be used to cover funeral costs and to leave some inheritance to your family.
And What About The Pros And Cons?
Ok, let’s hear the good bits…
- It lasts your whole life, so no matter when you die your family will receive a pay out. This means that you have the security and peace of mind of knowing that even when the kids are grown and have left home and maybe have children of their own, you can still leave an inheritance as well as something towards funeral costs etc.
- There are some Whole Of Life Insurance policies that you can cash in and receive some of the money before you die – although you should make sure you read your policy carefully because there could be charges associated with this.
And on the flip side….
- The cost of the premiums. At some point you will die, and the insurance company will have to pay out. Because of this the insurance company will set the premiums so that if you live long into old age they won’t be out of pocket – it’s nothing personal, it’s just business.
That’s really the only disadvantage, but obviously it’s a big one – those premiums have to be paid even if you are retired or no longer working in order to keep the policy going. If you don’t have an estate that’s going to require your family to pay inheritance tax and have some type of funeral cover etc, then you might prefer to stick to a Term Life Insurance plan that will cover you for the years that would be most financially devastating to your family should you die.
I’ve created a table to give you so examples of the cost difference. It’s based on needing £200,000 of life insurance, being a non-smoker, no medical conditions and no adverse family history.
| *200,000 | 20 year “term” policy | Whole of Life |
|---|---|---|
| 30 year old | £8.11 per month | £123.99 per month |
| 40 years old | £14.47 per month | £182.25 per month |
| 50 years old | £33.90 per month | £251.19 per month |
| 60 years old | £97.87 per month | £393.91 |
