Types of Life Insurance UK Which One is Right for You

Term, whole of life, family income benefit and more — explained in plain English

Navigating the world of life insurance can feel like trying to read a map in a foreign language. With so many different names, terms, and types of policies, it's easy to feel overwhelmed and put off making a decision that could be vital for your family's future.

But what if you could understand it all in plain English?

That’s exactly what this guide is for. As specialists in the UK protection market, we're here to demystify the options, break down the jargon, and give you the confidence to choose the right financial safety net for you and your loved ones. Whether you're a new parent, a homeowner, a business director, or simply planning for the future, this article will help you understand the landscape of life insurance in the UK.

What is Life Insurance and Why Might You Need It?

At its simplest, life insurance is a contract between you and an insurance company. You agree to pay regular amounts of money (called premiums), and in return, the insurer promises to pay out a cash sum if you pass away during the policy's term.

This payout, or 'sum assured', provides a financial cushion for the people you leave behind, known as your beneficiaries. Why is this so important? Consider the financial impact your absence could have:

• Your Mortgage: The average outstanding mortgage for a UK household is over £140,000. A life insurance payout could clear this debt, ensuring your family can stay in their home.
• Raising Your Children: The Child Poverty Action Group estimated in 2023 that the basic cost of raising a child to the age of 18 in the UK is over £160,000. This doesn't even include university fees. A policy can replace your lost income to cover these costs.
• Daily Living Expenses: From utility bills and food shopping to car payments and council tax, your income covers the essentials. Life insurance can provide a lump sum or a regular income to keep your family financially stable.
• Funeral Costs: The average cost of a basic funeral in the UK is now over £4,000. This unexpected expense can be a significant burden at an already difficult time.
• Leaving a Legacy: You might simply want to leave a tax-free inheritance for your children or grandchildren to give them a head start in life.

Essentially, life insurance is about peace of mind. It’s knowing that if the worst should happen, the people you care about most won’t have to face financial hardship on top of their grief.

The Two Main Categories: Term vs. Whole of Life Insurance

The first major fork in the road when choosing life insurance is deciding between a policy that lasts for a fixed period or one that lasts for your entire life. This is the core difference between Term Insurance and Whole of Life Insurance.

Let's explore each of these categories in much more detail.

Deep Dive: Term Life Insurance Explained

Term life insurance is the most common and straightforward type of cover in the UK. It's designed to protect you for a specific length of time (the 'term') that you choose at the outset, for example, 20 or 25 years. If you pass away within this term, the policy pays out. If you outlive the term, the cover simply ends, and you get nothing back.

Who is it for? It’s ideal for people whose financial responsibilities have a clear end date. Think of it as a safety net for the years your family needs it most.

There are several variations of term insurance, each suited to different needs.

Level Term Life Insurance

With a level term policy, both your monthly premium and the final cash payout amount remain the same throughout the entire term.

• How it works: You might choose £200,000 of cover for 25 years. Whether you pass away in year 2 or year 24, your family will receive £200,000. Your premium of, say, £15 per month will not change.
• Best for:
  • Covering an interest-only mortgage.
  • Providing a fixed lump sum for your family to invest or use for living costs and childcare.
  • Leaving a specific amount of money for your children's future education.

Decreasing Term Life Insurance (Mortgage Protection)

As the name suggests, with a decreasing term policy, the potential payout reduces over the life of the policy. Premiums, however, typically remain level.

• How it works: The payout is designed to decrease roughly in line with the way a repayment mortgage reduces over time. You might start with £200,000 of cover, but after 15 years, as you've paid off more of your mortgage, the cover might have reduced to £80,000.
• Best for:
  • Specifically covering a repayment mortgage. This is its most common use.
  • Anyone looking for the most affordable way to cover a large, decreasing debt. Because the insurer's risk reduces over time, premiums are lower than for level term cover.

Increasing Term Life Insurance

This type of policy sees the sum assured grow over the term to help protect its value against inflation.

• How it works: You might start with £100,000 of cover. The policy might be set to increase by 5% each year. After 10 years, your cover would have grown to over £162,000. Your premiums will also increase, but usually at a pre-agreed rate.
• Best for:
  • Protecting a lump sum intended for future family living costs from being eroded by the rising cost of living.
  • Anyone who wants the real-terms value of their payout to be maintained over a long period.

Here’s a simple table to summarise the main types of term insurance:

Deep Dive: Whole of Life Insurance Explained

Unlike term insurance, a whole of life policy does exactly what it says: it covers you for your entire life. As long as you keep paying the premiums, a payout is guaranteed when you eventually pass away.

This guarantee makes it more expensive than term insurance, but it serves very different purposes.

Who is it for? It’s primarily for those with financial needs that won't disappear over time.

Why Choose Whole of Life?

The main reasons people opt for this type of cover are:

1. Inheritance Tax (IHT) Planning: For estates valued above the current IHT threshold (£325,000 per person in 2025), a 40% tax is due on the excess. A whole of life policy can be used to provide a lump sum specifically to pay this tax bill, ensuring your beneficiaries inherit the full value of your estate. For this to work, the policy must be written 'in trust'.
2. Leaving a Guaranteed Legacy: You may want to leave a fixed sum of money to your children, grandchildren, or a favourite charity, regardless of when you die.
3. Covering Funeral Costs: A smaller whole of life policy can be an effective way to ensure your funeral expenses are covered without burdening your family.

Types of Whole of Life Policies

• Guaranteed Premiums (Non-Profit): This is the simplest form. Your premiums are fixed for life, and the payout amount is also guaranteed from the start. It offers certainty but no potential for growth.
• Reviewable Premiums: Here, the insurer can review your premiums every 5 or 10 years and increase them if their claims experience has been worse than expected. It might be cheaper initially but carries the risk of significant price hikes later in life.
• Investment-Linked (With-Profits or Unit-Linked): These policies have an investment element. Part of your premium is invested, and the final payout depends on the performance of the investment fund. They offer the potential for a larger payout but also come with higher risk and more complex charging structures.

Choosing between term and whole of life is a fundamental decision. At WeCovr, our advisers can walk you through your specific circumstances to determine which structure best aligns with your long-term financial goals.

A Closer Look at Family Income Benefit

What if your family would find a regular monthly income more manageable than a single large lump sum? That's where Family Income Benefit comes in.

It’s a type of term life insurance, but instead of paying out £200,000 in one go, it pays a tax-free monthly or annual income from the point of claim until the policy's end date.

How it works: Imagine you have two young children and you take out a 20-year Family Income Benefit policy for £2,500 a month.

• If you passed away in year 3, the policy would pay your family £2,500 every month for the remaining 17 years.
• If you passed away in year 18, it would pay the income for the remaining 2 years.

Who is it for? It's an excellent, and often highly affordable, option for young families. It’s designed to directly replace the breadwinner's lost monthly salary, making budgeting simple and ensuring that bills continue to be paid without the pressure of managing a large investment.

Life Insurance with Critical Illness Cover: A Powerful Combination

Life insurance pays out upon death, but what happens if you don't pass away? What if you suffer a serious illness that leaves you unable to work and facing significant medical costs? This is where Critical Illness Cover (CIC) becomes crucial.

CIC is designed to pay out a tax-free lump sum if you are diagnosed with one of a list of specified serious conditions. With statistics from Cancer Research UK showing that 1 in 2 people in the UK will be diagnosed with cancer in their lifetime, this cover is more relevant than ever.

Policies typically cover major illnesses like:

• Cancer (of a specified severity)
• Heart attack
• Stroke
• Multiple Sclerosis
• Kidney failure
• Major organ transplant

The lump sum can be used for anything you need: to pay off the mortgage, adapt your home, fund private treatment, or simply replace lost income while you recover.

You can buy CIC as a standalone policy, but it's most often combined with life insurance. The key thing to understand is whether your cover is 'accelerated' or 'additional':

• Accelerated Cover: The most common type. Your policy has one pot of money. If you claim for a critical illness, the life cover amount is reduced by the same sum. If you claim the full amount, the policy ends.
• Additional Cover: This is more expensive. You have two separate pots of money. A claim on the critical illness part does not affect your life insurance cover.

The definitions of illnesses can be complex and vary between insurers. This is an area where expert advice from a broker like WeCovr is invaluable, as we can help you compare the policy wording from different providers to find the most comprehensive cover.

Don't Forget Your Income: Income Protection Insurance

While life and critical illness cover provide lump sums for specific events, Income Protection is arguably the foundation of any financial protection plan. It’s designed to protect your single greatest asset: your ability to earn an income.

If you are unable to work for an extended period due to any illness or injury (not just a 'critical' one), this policy will pay you a regular, tax-free monthly income to replace a portion of your lost salary.

Key features to understand:

• The Deferred Period: This is the waiting period from when you stop working to when the policy starts paying out. It can be anything from 1 day to 12 months. You should align this with your employer's sick pay scheme or your personal savings. A longer deferred period means a cheaper policy.
• The Payout Period: This is how long the policy will pay out for. It could be for a fixed period (e.g., 2 or 5 years per claim) or right up until your chosen retirement age. Long-term cover provides the most robust protection.
• The Definition of Incapacity: This is crucial. The best policies use an 'own occupation' definition, meaning it will pay out if you are unable to do your specific job. Other, less comprehensive definitions like 'suited occupation' or 'any occupation' make it much harder to claim successfully.

For the self-employed, tradespeople, or those in riskier jobs, Income Protection (sometimes called Personal Sick Pay for short-term plans) is a non-negotiable part of their financial toolkit.

Specialist Life Insurance Solutions for Business Owners

If you run your own business, your financial protection needs are more complex. Standard personal policies may not be the most efficient solution. There are several tax-efficient, business-specific policies to consider.

Key Person Insurance

What would happen to your business if your top salesperson, genius developer, or even you, were to pass away or become critically ill? Key Person Insurance is a policy taken out by the business on a key employee. The payout goes directly to the business to cover lost profits, recruit a replacement, or repay business loans.

Relevant Life Insurance

This is a highly tax-efficient way for a limited company to provide a death-in-service benefit for an employee or director.

• The company pays the premiums.
• These premiums are typically treated as an allowable business expense.
• It's not usually considered a P11D benefit-in-kind, saving on National Insurance for both the employee and employer.
• The payout goes into a trust for the employee's family, keeping it outside the estate for IHT purposes.

For directors of small businesses, it's often a much more cost-effective way of getting life cover than paying for it personally out of taxed income.

Shareholder or Partnership Protection

If you own a business with others, what happens if one owner dies? Their shares will pass to their family, who may have no interest or ability to run the business. Shareholder Protection provides a lump sum to the surviving owners, allowing them to purchase the deceased's shares from their estate, ensuring a smooth transition and business continuity.

As you can see, the business protection landscape is specialised. At WeCovr, we have dedicated experts who help company directors and business owners structure these policies for maximum tax efficiency and protection.

How to Choose the Right Life Insurance Policy for You

With all these options, how do you decide? The right choice depends entirely on your personal circumstances, budget, and financial goals.

Here is a quick-reference guide matching life stages to common policy choices:

To find the right cover, ask yourself three key questions:

1. How MUCH cover do I need? A simple way to estimate is the D.E.A.D. acronym: add up your Debts, Education costs for children, After-tax income to replace (multiplied by the number of years), and a Death fund for funeral costs.
2. How LONG do I need it for? Match the term to your longest financial commitment. This is usually until your mortgage is paid off or your youngest child is financially independent.
3. What can I AFFORD? It's better to have an affordable policy that you can maintain than an expensive one you might cancel later. A good broker can help you balance the level of cover with your budget.

The WeCovr Difference: More Than Just a Policy

Choosing the right type of life insurance is just the first step. The UK market has dozens of providers, all with different pricing, underwriting philosophies, and policy definitions. Trying to compare them all yourself is a monumental task.

This is where we come in. As an independent brokerage, we work for you, not the insurance companies.

• Whole-of-Market Comparison: We compare plans from all the major UK insurers to find the policy that offers the best value and most comprehensive cover for your specific needs.
• Expert, Jargon-Free Advice: Our friendly, UK-based advisers are experts in their field. We take the time to understand your situation and explain your options in plain English, ensuring you're empowered to make the right decision.
• Support for Your Health: We believe in a proactive approach to wellbeing. That’s why all our clients get complimentary access to CalorieHero, our exclusive AI-powered calorie and nutrition tracking app. It's our way of helping you build healthier habits for a longer, happier life, showing that our commitment to your wellbeing goes beyond just the policy.