Term or whole of life insurance: how to choose in the UK

Take two 40-year-olds in the same health, each buying £500,000 of life cover. One pays far more each month than the other, for the same payout.

The difference is not the insurer. It is the type of policy. For most people the right type takes a few minutes to work out, and this guide walks you through it, along with the one case where the dearer policy is the better choice.

Exhibit 1

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On this page

Term life insurance covers a set number of years

Term life insurance — also called term assurance — covers you for a set period, often 10, 20 or 25 years. If you die within the term, the insurer pays a lump sum to the people you choose. If you outlive it, the cover simply ends: nothing is paid out, and you get no premiums back.

There are three kinds, each for a different job:

Type	How the payout works	Best for	Cost vs level term
Level term	Fixed lump sum throughout	Income replacement; interest-only mortgages	Baseline
Decreasing term	Payout falls each year with mortgage balance	Repayment mortgages — cheapest option	Cheaper
Increasing term	Payout rises annually with RPI (Retail Price Index — the measure of how much everyday prices rise each year)	Long-term family protection, preserving real value	Dearer

A decreasing term policy assumes your mortgage shrinks on a fixed schedule, at the interest rate when you took the policy out. Your real mortgage rarely follows that schedule. Remortgages, rate changes, overpayments and payment holidays all pull the two apart.

In the early years the gap is small, and the lower premium is worth it. But if you have remortgaged at a very different rate, overpaid a lot or extended your term, the payout can fall below what you still owe, just when your family needs it.

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Whole of life insurance pays out whenever you die

Whole of life insurance has no end date. It covers you for the rest of your life, and it pays out whenever you die, as long as you keep paying the premiums.

Because the insurer knows it will pay out one day, it charges for that certainty. For the same person and the same payout, whole of life costs far more each month than level term.

Premiums that can rise as you get older

Whole of life policies come with one of two kinds of premium:

• Guaranteed premiums — fixed from day one, and never change.
• Reviewable premiums — start lower, but the insurer can raise them at each review, often every five or ten years.

If the policy is for inheritance tax — the 40% tax on estates above a threshold, explained below — choose guaranteed premiums. A policy you can no longer afford in twenty years does not solve the problem you bought it for.

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Three questions that decide which you need

Do you need cover for a set period, or for life?

If you are protecting a mortgage that ends in 22 years, or covering the years until your children can support themselves, you have a set window. Term insurance is built for exactly this.

Is your main worry replacing your income?

Replacing your income and paying off a mortgage are needs that shrink over time: the mortgage goes down, the children grow up, and your own savings build. Term is built for this too.

Is your estate likely to face inheritance tax?

Inheritance tax is charged at 40% on the part of an estate above the nil-rate band, which is £325,000 per person (GOV.UK). If your estate is likely to be above it, the answer changes.

Question	Answer	Product
Do I need to cover a fixed period?	Yes	Term — match the term to the need
Is my estate likely to face IHT?	No	Term — whole of life unnecessary
Is my estate likely to face IHT?	Yes	Whole of life in trust — see next section
Over 60, no dependants, estate above IHT threshold?	Yes	Whole of life in trust specifically
Over 60, no dependants, estate below threshold?	Yes	Probably no cover needed

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When whole of life is the right choice: inheritance tax

Inheritance tax is charged at 40% on the part of your estate above the nil-rate band: £325,000 per person in 2026/27, and fixed at that level until 5 April 2031 (GOV.UK, Inheritance Tax thresholds).

A married couple or civil partners can pass on an unused allowance, so together they have £650,000. On top of that, the residence nil-rate band — an extra £175,000 each when your home passes to your children or grandchildren — can take a couple’s combined threshold to £1,000,000.

The bill is due by the end of the sixth month after death, usually before probate — the court process that gives your family access to the estate — is granted.

How the policy pays the bill

A whole of life policy written in trust sits outside your estate.

When you die, the trust pays out directly, without waiting for probate, usually within weeks of the death certificate. The money arrives first, the tax bill gets paid, and the estate passes to your family intact.

For married couples the usual choice is a last-survivor policy — it pays out when the second partner dies, which is when the inheritance tax falls due.

The premiums can sit outside your estate too

HMRC’s exemption for normal expenditure out of income lets regular gifts from surplus income fall outside your estate. Whole of life premiums paid year after year by standing order from your salary may qualify.

HMRC looks for three things: the payments come from income, not capital; they form a regular pattern; and they leave your standard of living unchanged.

A standing order from a salary account, kept up over several years, is the clean way to do it. HMRC expects evidence, so ask an estate planning solicitor to keep a simple record of your income and spending.

Pensions count from April 2027

From 6 April 2027, most unused pension pots and pension death benefits count as part of your estate for inheritance tax (Finance Act 2026; GOV.UK). Many people who thought their estate was under the threshold will find it is over, and more families will need to think about whole of life in trust.

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Would investing the premiums do better?

If inheritance tax is the reason for the policy, ask a fair question: would you do better investing the monthly premium yourself, and using the pot to pay the bill?

One way to compare them is the break-even return — the yearly investment return at which the invested pot would exactly match the policy’s payout.

Three things set that break-even return:

• The premium next to the payout — the dearer the cover, the easier it is for investing to win.
• How long you live after buying — the longer, the more time your investments have to grow.
• Whether the premiums qualify for the income exemption — if they do, they leave your estate as you pay them, which is worth up to 40% of every premium.

For a healthy 65-year-old, the yearly premium is a sizeable share of the payout. Over 15 years, investing has to earn about that same share each year just to break even: possible, but not certain. Over 25 years, the maths tilts towards investing.

What that comparison misses is that inheritance tax falls due on one day that nobody can predict. What matters is not what your investments are worth on average, but what they are worth on that day. If markets have just fallen, the pot may be short. The insurer carries that risk for you; an investor cannot get rid of it.

So the certainty of a policy is worth most when the estate is mostly property with little cash, so your executors might have to sell the house at a bad moment to pay the bill, and when you cannot be sure you will keep investing late in life.

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Put your policy in trust, whichever type you buy

Whether you choose term or whole of life, one step applies to almost every policy: write it in trust.

A trust is a legal arrangement that hands the policy to trustees — people you choose to pass the money on as you wish. The payout then avoids two things:

• Probate — the court process that unlocks an estate, which can take six to eighteen months. A policy in trust pays out in weeks.
• Inheritance tax — a payout inside your estate can be taxed at 40% above the threshold. A policy in trust sits outside your estate.

Exhibit 2

Writing a policy in trust is free, and your insurer gives you the form. It takes about thirty minutes.

Three kinds of trust are in common use:

Trust type	Key advantage	Key risk	Best for
Bare trust	Simplest to set up	Irrevocable — cannot change beneficiaries	Only where beneficiaries and shares are completely certain
Discretionary trust	Trustees adapt to changed circumstances	Requires trustees to exercise judgement	Most families — the right default
Split trust	Separates life and CI (critical illness — pays on diagnosis of a serious condition) benefit	Slightly more complex	Policies combining life and CI cover

The choice between a bare and a discretionary trust is about more than paperwork. A bare trust cannot be changed once it is signed: the people named and their shares are fixed for good, whatever happens later, such as a divorce, a death or a new child.

A discretionary trust lets your trustees respond to exactly those changes. For most families with young children and a 25-year policy, that flexibility is worth the extra responsibility it gives the trustees. Your insurer’s standard form is almost always a discretionary trust. Use it.

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Questions people ask

Is whole of life insurance worth it in the UK?

For most people under 55 who do not face a large inheritance tax bill, no.

If your estate is likely to be above the threshold, a whole of life policy written in a discretionary trust is an effective planning tool, especially when the premiums qualify for HMRC’s exemption for normal expenditure out of income.

Can I switch from term to whole of life?

Some term policies let you switch to whole of life without answering new medical questions, so the insurer cannot raise the price because your health has changed. Check your policy documents.

What happens if I stop paying whole of life premiums?

Most whole of life policies stop if you stop paying. Some build up a surrender value — cash the insurer pays back if you cancel — but it is usually far less than the premiums you paid.

Does whole of life pay out for any cause of death?

Yes, as long as the policy is in force and your premiums are up to date. Unlike critical illness cover, which pays only when you are diagnosed with a condition on the insurer’s list, whole of life does not depend on the cause of death.

Should I put my life insurance in trust?

Almost always, yes. A trust gets the payout to your family without waiting for probate, and free of inheritance tax. It costs nothing.

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Which policy fits you

• Family with a mortgage and children under 18 — level term, written in a discretionary trust. Match the term to whichever comes later: the end of the mortgage or your youngest child’s 21st birthday.
• Couple in their 50s, estate likely above the threshold — last-survivor whole of life with guaranteed premiums, written in a discretionary trust. Check whether the premiums qualify for the income exemption, and apply the 5% rule of thumb above before you commit.
• Single, no dependants, estate below the threshold — you probably need no life insurance.
• Anyone buying life insurance of any kind — write it in a discretionary trust. It is free, takes about thirty minutes, and protects the payout from probate delays and inheritance tax.

→ What to look for in a life insurer in the UK

→ Income protection insurance in the UK: do you need it?

→ How much life insurance do I need?