Term vs whole of life insurance: what's the difference?

Last updated 21st June 2024 by The SunLife Content Team

If you’re looking to take out life insurance, you may be unsure about the differences between term and whole of life cover.

Insurance can be complex, and with your family’s future in mind, it’s important to understand the two types and make an informed choice.

What is the difference between term and whole of life insurance?

There are two main types of life insurance policy:

• Term insurance - You are insured for a fixed period of time, like 25 years.
• Whole of life insurance - You are insured for your whole life, no matter how long live.

On the surface, both work in a similar way. You pay premiums (usually monthly), and a tax-free lump sum is paid out to your beneficiaries after you die.

But, there are some differences that may make one more suitable than the other.

Let's look at term vs whole of life insurance in more detail.

What is term life insurance?

Term life insurance is a type of policy that only covers you for a specific amount of time.

This type of plan pays out if you die during the policy period. But, if you cancel the policy early or outlive the period of cover, you won’t get anything back.

There are also different types of term policies available on the market. Some of these may be more suitable for your needs than others.

• Level term insurance - Your payout amount and your premiums remain the same throughout the policy. You might choose this if you want to know exactly how much you'll pay in and would get out from your policy if you died.
• Decreasing term insurance - Your payout reduces in size over the length of the policy. Your premiums stay the same, but they will likely be cheaper than  'level term' cover. You might choose this if your payout is to cover a debt which is also reducing over time. Like a mortgage which you are making regular payments on.
• Increasing term insurance - Your payout gets bigger over time to protect against inflation. But, the premiums will also rise. You might choose this if your payout is to go towards a cost that is likely to increase with inflation. For example, household bills or rent.

Some insurers set limits on the length of term cover or policyholder age. So make sure to check your eligibility before applying.

What is whole of life insurance?

Whole of life insurance is a type of policy that covers you until you die, no matter how long you live.

Many 'over 50s life insurance' products are whole of life plans. Such as SunLife's own Guaranteed Over 50 Plan and the Guaranteed Inheritance Plan.

This may be a suitable option if there is something you know you will want to leave money for, no matter how long you live. For example, a payout to go towards your funeral costs, or a nest egg for loved ones to spend how they choose. 

As long as you pay your premiums, you will be covered and a payout is guaranteed on your death.

It’s important to remember that whole of life policies require you to pay premiums from the start of the policy for the rest of your life, or until you reach a certain age.

In some cases, this may mean that you pay in more than the value of the eventual payout. If you cancel the policy early, you won’t receive any money back. So make sure you can commit to this type of policy before applying.

Some policies also have a 'moratorium period'. This means if you die in the first year or two of cover, you won’t get your full payout. But your estate may get a refund of any premiums paid up to that point.

Which is better – term or whole of life insurance?

There are pros and cons to both types of policy. Which is better depends on your specific needs.

Here are some important factors to consider when deciding whether term or whole of life insurance is the better option for you.

Your age

Most life insurance policies have a minimum or maximum policyholder age. For example, you must be 49 or over to apply for 'over 50s' whole of life plans such as SunLife's own Guaranteed Over 50 Plan and the Guaranteed Inheritance Plan. The maximum policyholder ages are 85 and 75 respectively. 

If you’re older or younger than this, you may need to opt for a term policy instead.

Your health

Your health and whether you smoke are also factors in eligibility. Some policies may be unavailable or more expensive if you have certain pre-existing conditions.

Term assurance is usually 'underwritten'. This means it often requires a long health questionnaire, and sometimes even a medical exam. This is so the insurer can assess the risk they are taking on.

In contrast, many whole of life policies are 'guaranteed acceptance'. This means there are very few (if any) health questions.

But you can get some whole of life policies, like SunLife's Guaranteed Inheritance Plan, which are underwritten. This means there are health questions, but eligible applicants can access bigger payouts compared to a guaranteed acceptance plan. 

With term insurance, you may need to let your insurer know if you are diagnosed with a new condition. But with whole of life, you usually don't.

Cost of premiums

Sometimes the answer to term vs whole of life simply comes down to which option you can afford. But remember, after a term policy expires, you will have to take out another policy if you wish to remain covered.

It’s likely that your monthly premiums will rise as you get older, so this policy may become less affordable. On the other hand, many whole of life policies offer cover with fixed premiums no matter how long you live, so the cost will never rise.

Your financial obligations

If you have financial obligations which are likely to last a fixed number of years, this could be a factor.

For example, if you only have 10 years left on your mortgage, you might choose to take out a 10-year term policy – ensuring your dependants are able to pay off the outstanding debt should you die.

Or, you might choose term life insurance to provide protection until your children have grown up and moved out of the family home.

Payout

The size of the final payout is important to ensure you can provide the financial protection your family needs.

Term insurance may offer a larger payout than whole of life insurance for the same monthly premiums. But, it’s important to remember that a payout is guaranteed for whole of life insurance.

Where the cash payout is fixed, inflation will reduce its buying power over time. So, a payout of £10,000 will be worth less in 20 year's time. This is particularly relevant for whole of life policies, where you could be paying premiums for many years.

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If you’re looking for whole of life insurance to leave an inheritance for your loved ones, SunLife’s Guaranteed Inheritance Plan may be for you. It is available to 49-75 year olds in reasonably good health, and offers payouts of between £5,000 and £50,000.

SunLife also offers the Guaranteed Over 50 Plan, whole of life cover with guaranteed acceptance for 49-85 year olds. It's quick and easy to apply online and there are no medical questions.

If you want to find out more about life insurance, here are some of our other useful articles:

• What is the Guaranteed Inheritance Plan?
• Putting your life insurance in trust
• When should I get life insurance?