Types of life insurance explained

12 min Read Published: 21 Feb 2024

what types of life insurance are thereIn this article, we explain how life insurance works, describe the different types of life insurance cover that you can buy and give some guidance on what cover may be best for you and where best to buy it as well as get up to £100 cashback*.

What is life insurance?

Life insurance is an insurance product that allows you to financially protect your dependents if you die by leaving money to them. If you die and meet the terms and conditions of the policy, the insurer pays the insured sum of money so the money can be used to pay off debt, such as a mortgage, credit cards or loans as well as replacing lost income. Alternatively, you may wish to nominate the people you wish to benefit with your life insurance payout avoiding inheritance tax and we explain how to do this later in this article.

Different types of life insurance explained

There are many types of life insurance and we explain below how each life insurance policy works. Some types of life insurance are designed to decrease in line with an outstanding loan, some life insurance plans will increase with inflation, some will cease on a set date (with nothing to pay if you don't die) and some will continue for the whole of your life, paying out when you eventually die. You can buy life insurance as a single or a joint life insurance policy. As there are so many different kinds of life insurance, we explain each in detail below.

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What is term life insurance?

Sometimes referred to as 'level term assurance', term life insurance is the simplest and most popular type of life insurance. It will pay out only if death occurs within the term of the policy (the number of years the policy is taken out for) or if the person insured becomes terminally ill and is likely to survive less than 12 months, when an early death claim can be made under terminal illness cover which is usually included with life insurance. Most policyholders will select a term of between 5 and 30 years and the term life insurance policy is usually taken out to cover a mortgage, debts or to cover the loss of income if the policyholder dies.

As the policy is taken out for a set term, the cost of the cover (referred to as the premium) is often cheaper than a whole of life policy, which we explain in more detail below.

Who should consider buying term life insurance?

Term life insurance is good for those who wish to insure something specific, such as a debt or provide a safety net for a period of time such as while your children are growing up and are dependent on you. The key consideration is that you will stop needing this type of life insurance at some point and will not need it to continue until you die - it is there in case death happens prematurely.

It is cost-effective and will ensure that debts are covered, bills and school fees can be paid, and those left behind are not financially burdened by your death. When selecting the term, most people will match the term of their mortgage, or perhaps when their youngest child turns 21 and is no longer financially dependent.

A good life insurance specialist* will be able to search the market and provide you with the best life insurance quotes for your individual circumstances. We explain how to get the cheapest life insurance quotes later in this article.

What is decreasing term insurance?

Similar to term life insurance, a decreasing term insurance policy (sometimes referred to as Mortgage decreasing term insurance) will pay out only if death occurs within the term of the policy. However, rather than paying out a set lump sum, the amount you are insured for will decrease during the term of the policy. The cost of a decreasing term life insurance policy is cheaper than what you would pay for a level term life insurance policy. However it is always worth getting a price for both because in some cases there might be very little or no difference in the cost and a level term life insurance policy may be better in that case.

Who should consider buying decreasing term insurance?

Decreasing term insurance is good for those wishing to insure a debt that is reducing, such as a loan or mortgage. As your loan or mortgage balance reduces, so will the life insurance so that you're only covered what you need at any point during the term.

What is whole of life insurance?

Sometimes referred to as 'whole of life assurance', as the name suggests, whole of life cover will cover you for your whole life and has no set term. As the policy is guaranteed to pay out, it will often be more expensive than term life insurance.

A 'non-profit' whole of life policy has no investment element and you are paying purely for the protection. On a 'non-profit' policy, if you stop paying the premiums, the policy will cease and there will be no payout or money back.

A 'with-profit' whole of life policy or 'unit-linked' whole of life policy includes an investment element. Any profits will either be added as a bonus to the policy or used to purchase more units, meaning the higher the payout at the end. As with all investments, the value can go up and down and so the payout may be worth less, or in the case of a unit-linked whole of life policy, you may find that your premium increases over time.

If you cancel a 'with profit' or 'unit linked' whole of life insurance product, your policy may be converted to a paid-up policy upon cancellation (so long as enough premiums have been paid). The insurance company may use the invested element to continue servicing the life insurance and so your potential payout could reduce over time and can even reduce to zero and cease.

Who should consider buying whole of life insurance?

Whole of life insurance may suit someone who wishes to leave a sum of money upon their death whenever that happens. Typically, whole of life insurance is bought by those who wish to leave money to cover an inheritance tax bill or to provide a nest egg for a specific person. However, Whole of life insurance should be considered alongside various other ways to achieve your goals. Our article 'The 10 best ways to avoid inheritance tax' may provide some extra information should you need it and you should always seek advice from an independent life insurance specialist*. They will be able to assess your needs and ensure it is the right option for you.

What is over 50's life insurance?

Over 50's life insurance is a type of life insurance policy for anyone aged over 50. Similar to whole of life insurance, there is no set term and so premiums are to be paid until death to guarantee a payout. Over 50s life insurance does not require underwriting, this means that you are guaranteed to be accepted regardless of your health, so long as you meet the age requirements. You will usually have to complete a qualifying period of between 12 and 36 months before the policy will payout and you'll have to keep paying your premiums until a specified age to ensure the life insurance is paid out when you die. We cover over 50's life insurance in more detail in our article 'Which is the best over 50's life insurance?'

Who should consider buying over 50's life insurance?

With guaranteed acceptance, it can be a cost-effective way of insuring yourself if you are in poor health, if you do a dangerous job or pastime or if you have a complex medical history. Most people take out over 50's life insurance plans to cover funeral expenses. It can be an appropriate way to provide for your funeral costs and other small bills as the sum that you can insure is usually limited to around £20,000. You can find more information to help you decide in our article Life insurance or Funeral plan - which is best?.

Other types of life insurance

Family income benefit

The policy will pay out a regular income upon death. Family income benefit is designed to replace the income that would have been provided by the policyholder had they been alive. While it may sound similar to decreasing term insurance, the payouts are designed to pay a monthly, tax-free income, rather than a one-off lump sum.

Increasing term insurance

Similar to term life insurance, but instead of the payout remaining the same over the term, the sum you are insured for increases each year, usually in line with inflation. You will be contacted by the insurer each year and will have the option to accept or decline the increase. If you accept, your premiums will also increase in line with inflation. Depending on the insurer, increasing term insurance policies can also be increased each year using the retail price index (RPI), consumer price index (CPI) or by a fixed percentage.

Renewable term insurance

Similar to term life insurance where you are insured over a set policy term, however you have the option to extend the term when the original policy term comes to an end. The advantage is that you would be able to renew your life insurance without the need to complete another health questionnaire or assessment. Premiums may be increased based on your age at the point that you renew your policy, but you will not have to undergo further medical checks. This is especially handy if you have suffered health complications since the original policy was taken out as these will not be taken into account or reflected in the cost of the new policy.

Types of life insurance and what they are best for

Type of life insurance Term Payout Money back^ Best for:
Level term life insurance 1-50 years Level - pays out the same whenever you die within the term No
  • Family - financially support dependents and partner
  • Mortgage - secure home
  • Loan - secure debt
Decreasing / mortgage term life  insurance 1-50 years Reduces - payout reduces each year of the policy, usually in line with a repayment mortgage No
  • Repayment mortgage - secure home
Increasing term insurance 1-50 years Increases - payout increases at rate of inflation or a flat percentage, 1-10% each year to protect the value of the sum assured No
  • Family - financially support dependents and partner
Renewable term life insurance 1-10 years Level or increases - you can choose (see above)

If there is no claim, you can renew at the end of the policy without applying again

  • Business - protect against loss of a key employee
  • Short term - any other short term need that could become long term


Whole of life insurance Entire life Level or increasing -  you can choose Possible
  • Inheritance tax - fund tax bill on death
  • Gift
  • Funeral
Over 50s life insurance Entire life Usually level - the payout is the same regardless of when you die except, usually in the first 12 to 36 months when you may only receive your premiums back unless your death is accidental Possible
  • Funeral
  • Gift
Family income benefit 1-50 years Level or increasing - you can choose No
  • Family - living costs, school fees, mortgage/debt payments

^money back refers to whether you would receive any of your premiums or money back if you cancelled or surrendered the policy without claiming

Life insurance - Frequently asked questions

Below we have answered the most frequently asked questions.

How much life insurance do I need?

The amount of life insurance you need will be based on your own personal circumstances. An independent life insurance specialist can help you to work out the right type of life insurance cover as well as guide you on the correct amount to take out, however, as a starting point, you should consider the following:

  • do you have a mortgage, or any other debts or funeral expenses that need to be covered?
  • will there be a potential Inheritance Tax (IHT) bill payable on your estate? The current IHT threshold is £325,000 per person.
  • do you know the amount of money your family or dependents may need in the event of your death, whether that be a regular income or a lump sum?

We go into more detail in our article 'How much does £100,000 life insurance cost'.

Can I have two life insurance policies?

Yes. In fact, there is no limit to the number of life insurance policies you can have, so long as you can justify the reason for needing it. One of the questions that a life insurance company will ask on a life insurance application form is whether you have existing cover elsewhere. If an insurer thinks that you are (in their opinion) over insured, then you may be refused cover. Even if you have life insurance through your employer in the form of death in service benefit.

Can I cash in my life insurance if I don't claim?

None of the life insurance policies that we have mentioned in this article, except unit-linked whole of life policies, provide a cash-in value if you survive. Some older policies, such as endowment life insurance policies may have a cash-in value, but as the payout is not guaranteed and the performance in the past has been generally poor, they are rarely sold.

What type of death does life insurance cover?

A life insurance policy will cover you in the event of any death. So long as you have been honest on the application form, keep your premiums up to date and are within your policy term, then the policy will pay out. You may be surprised to learn that most insurance companies will even cover you for suicide, although you will not be able to claim in the first year (sometimes less with some insurers)

Can I cancel my life insurance policy?

Yes. You can cancel your life insurance policy at any time by cancelling your direct debit. Life insurance premiums are usually collected one month in advance and so you are likely to be covered for 30 days from when your last premium was collected. Think carefully before cancelling your existing life insurance cover however because premiums are based on your age and health at the time of application. If you need to re-apply and you are older and have additional health complications, you may find the cover is more expensive or you may even get refused cover.

How much should life insurance cost?

The cost of life insurance will depend on many factors. You will initially be given a quote based on the following factors:

  • the amount of cover you need
  • the length of time you take the cover for
  • the type of cover you are applying for
  • your age
  • whether you smoke

If you are happy with your quote and you wish to apply, you will be asked further questions which, depending on your answers can potentially increase your premium. Questions will be based on the following:

  • your health
  • your family's health
  • your job
  • whether you do any dangerous sports or hobbies

It is because of these extra questions that it is important to pick the best insurance company from the outset. For example, one company may offer the cheapest quote, but upon assessing your application, they could decide to double your original premium. If you knew that from the start, then you would have been better selecting the second cheapest quote from the outset.

How to guarantee the cheapest life insurance quotes

Most people assume that the best way to guarantee the cheapest life insurance quotes is to use a life insurance comparison site or an online calculator. While they may be able to give you a guide on the initial price, they are unable to do the crucial second stage that looks at your own personal circumstances and assesses you based on your health, your family's health, your job and your hobbies and pastimes.

The best way to buy life insurance is to use a specialist independent life insurance broker* as they will search the whole of the market for you and will select the right life insurance policy from outset, using their knowledge and expertise to help you understand which life insurance covers what you need. They can also help to fill out the forms, chase the insurance company on your behalf and even place the policy into trust, which is crucial if you want the money to pay out swiftly and without the need for your dependents to pay inheritance tax.

We have personally vetted the services of a specialist independent life insurance broker* that will be able to do all of the above for you, plus you will get up to £100 cashback if you take the policy through them. The firm employs strong ethics and will only ever offer a policy if it is the best policy to suit your needs. Due to their size and the influence that they have in the industry, they are able to guarantee to beat any quote, including those offered by online comparison sites. To speak to an adviser, with no obligation to take things further, just fill in the form via the above link.


If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch