Types of life insurance in the UK

Life insurance in the UK can be extremely diverse. Insurance companies compete with each other to create products with different durations, specific coverage and different payment methods. Customers sometimes confuse different types of insurance or misinterpret the terms and conditions presented in offers. To help you make your decision, we have decided to prepare this post – treat it as a comprehensive guide to help you focus on choosing a specific product.

What are the differences between the various types of life insurance?

In order to better understand each of the product types discussed, it is first necessary to identify several factors that define them.

Purpose of insurance

Most people have a fairly clear idea of the purpose of their insurance, although they often do not make this decision consciously. Life insurance is designed to protect loved ones from the financial consequences of the insured person’s death – for example, by replacing lost income or helping to pay off a mortgage.

Duration of protection

Policies can run for different lengths of time – for example, 10, 20, 30 years or longer, depending on the insurer and your age. The decision on the duration of the contract should be influenced by factors such as your age, the age of your children and the number of remaining mortgage instalments.

Method of payment of the benefit

Most insurers pay out a lump sum when the condition specified in the contract is met (death of the insured person). However, there are companies that provide regular payments for a specified period of time. The first type of life insurance is better suited to policies aimed at increasing the value of the estate, while the second is better if you want to protect your spouse in the event of a sudden drop in income.

Number of insured persons

Couples can choose between two single policies and one joint policy. Two single policies can pay out on each death and leave the surviving partner covered, whereas a first-death joint policy pays out only once and then ends. A joint policy is often cheaper than two single policies. This is an important choice when planning your family’s future.

Types of life insurance

Usually, insurers divide their products into the following types:

• Term life insurance

• Whole of life insurance

• Joint life insurance

• Over 50s life insurance

Now we will describe each of these types of insurance:

Term Life Insurance

Term life insurance covers you for a set period of time. As the name suggests, the contract is concluded for a predetermined period of time – for example, 10, 20 or 30 years, depending on the insurer and your age. Throughout the term of the contract, the insured person pays premiums and is covered by the insurance, but the benefit will only be paid if the insured person dies within the policy term and does not breach the terms and conditions of the contract, for example by concealing information about their smoking addiction.

Types of term life insurance in the UK

• Level Term Insurance (insurance with a fixed sum) – in this case, the amount that loved ones can receive is determined when the contract is concluded and does not change during the term of the insurance. This option suits people who want the same payout whenever they die within the policy term, for example to provide for their family.

• Decreasing Term Insurance – the amount of the benefit decreases over the term of the policy. This option is mainly aimed at people who have a gradually reducing financial obligation, such as a repayment mortgage. Year after year, the amount they have to repay gets smaller, so there is no need for the cover to remain the same. Premiums are usually fixed for the whole term, and this type of policy is typically cheaper than level term cover because the payout falls over time. If the mortgage is repaid more slowly than expected (for example, because of a higher interest rate), the cover may not be enough to pay it off in full.

Let’s assume that John has a 25-year mortgage and takes out a Decreasing Term policy for the same period. If he were to die in the fifth year of coverage, the sum insured would be very high – e.g. £180,000. This would enable his family to repay the mortgage early and free themselves from the obligation. The same would happen if John died after 20 years – although the benefit would be lower, most of the capital would already have been repaid, so £50,000 would also free his family from debt.

• Increasing Term Insurance (insurance with an increasing sum) – the last subtype of term insurance offers a benefit that increases over time. It is mainly aimed at people who take out long-term cover and want the payout to keep pace with inflation. As you might expect, the premiums also increase, so this option typically costs more than level term cover.

Who is term life insurance for?

Consider this type of insurance if:

• You have a mortgage in the UK and want your family to be able to pay it off;

• You have a child or children of school age and want to provide for them in the event of your death;

• You have modest savings, but they will grow over time.

Term insurance will not be a good choice if:

• You want cover that pays out whenever you die, rather than only within a set term;

• You want insurance that will increase your estate.

Whole of Life Insurance

Another option is whole of life insurance. As long as the premiums are paid, it pays out whenever you die. In the standard version of such a policy, the amount of the benefit is determined in advance and does not change over the duration of the coverage. It is worth remembering that insurance premiums for Whole of Life Insurance are typically higher than those for term insurance, because as long as the policy stays in force, a claim will eventually be paid.

Whole of life insurance with profits

Some insurance companies offer whole life insurance with an investment component. These policies have different names – they are usually referred to as Whole of Life with profits/Unit-linked/Investment. In this case, the insurance company invests part or all of the premiums paid into various investment funds. As a result, the amount of the benefit may increase or decrease, depending on the performance of the investment. The value of the investment can fall as well as rise, charges apply, and the payout is not guaranteed to grow.

Personally, we advise our clients against purchasing such solutions. Combining protection and investment in one policy can add charges and complexity, and keeping them separate lets you choose each on its own merits.

Who should use whole of life insurance?

Consider this life insurance policy if:

• You want lifelong cover, for example to leave a lump sum to your family or to help with funeral costs.

• You treat life insurance as a way to provide your family with an inheritance after you pass away.

Choose a different type of life insurance if:

• You are looking for an affordable policy;

• You want to invest money to give your children or grandchildren a good start in life.

Joint Life Insurance

Joint Life Insurance is a policy that covers two people – usually a couple or spouses. This solution is often cheaper than two separate single policies, but it usually pays out only once, so it should be carefully considered and tailored to the individual situation. Joint Life Insurance can be either term or whole of life insurance and has two subtypes:

• Joint Life - First Death - in this case, the benefit is paid after the death of the first person, after which the policy expires. If the second person wants to continue to be covered, they must purchase another policy;

• Joint Life - Second Death - choosing this option means that the benefit will only be paid to the relatives after the death of both persons.

Which of these subtypes is better depends on the individual situation of the family. Joint Life - First Death is a better option when both spouses earn similar incomes and want to provide security for the whole family in the event of the death of one of them or, for example, are paying off a mortgage. The second type, Joint Life - Second Death, is often used for estate planning, for example to help pay an inheritance tax bill.

How to use joint life insurance?

Let’s use an example that should clearly illustrate the possibilities offered by current life insurance policies:

Anna and Bogdan are married. Bogdan earns around £90,000 a year, while Anna focuses primarily on raising their children, earning just £25,000. To ensure a high level of security, the couple did not limit themselves to one policy. Instead, they have joint life - second death insurance, which will pay £250,000 to their children on the death of the second spouse, as long as the premiums are paid. To keep Anna safe, Bogdan also took out individual life insurance for £100,000. This ensures that his wife will have additional cash to organise his funeral, pay off any loans or cover medical expenses in old age.

This combination would not pay out on Anna’s death alone. Before deciding that she needs no separate cover, the couple should consider the cost of replacing childcare and household work, as well as any income lost. The example illustrates different payout timings; it does not establish that this is the right or cheapest arrangement for them.

When is it worth taking out joint life insurance?

This type of life insurance is designed for couples:

• Where both individuals require life insurance;

• Where there are beneficiaries or it is anticipated that one partner may live significantly longer than the other, for example due to age.

A joint policy is not a good choice if:

• You have no heirs.

Over-50s Life Insurance

The last type of life insurance is quite specific, but popular in the United Kingdom, insurance for people over 50 years of age. It is a fairly simple product, but it works slightly differently than other policies. To understand it better, it is worth knowing why it was created. Namely, with ordinary life insurance, the age and health of the person to be covered are analysed. As a result, people with serious health conditions or at an older age may find standard cover expensive or hard to obtain. Therefore, a policy was created with guaranteed acceptance and no medical questions for people within the insurer’s age limits (for example, UK residents aged 50 to 80).

However, this solution has its limitations – the payout is typically modest and may not cover the full cost of a funeral, so it is usually intended to help with costs such as funeral expenses or to provide a small sum for loved ones. In addition, there is a risk that the insured will overpay for the policy if they live long enough. Some plans stop taking premiums at a set age (for example, 90) while the cover continues for life, so check how long you will need to pay. These issues therefore need to be carefully considered in order to choose the right insurance option when purchasing. It is also worth remembering that life insurance for over-50s usually has an initial period (for example, the first 12 months): if the insured person dies of natural causes during it, their family receives a refund of the premiums paid rather than the full benefit, although accidental death is usually covered from the start.

When does over-50s life insurance make sense?

Consider this type of life insurance if:

• You have no savings whatsoever – this type of plan is usually meant to help with funeral costs, not to pay out a large sum such as £100,000 to your children;

• You are elderly and in poor health – otherwise, you may be eligible for a standard, cheaper policy.

Do not buy over-50s life insurance if:

• You are looking for substantial financial security for your family – a larger payout from standard life insurance, or your own savings, may be more suitable;

• You have a large amount of savings;

• You are in good health.

How do I know which life insurance policy to choose?

Although many people do not need more than one of the above-mentioned life insurance policies, purchasing several policies may be justified. We can review your insurance needs and compare available cover, including its costs, conditions and exclusions. Our insurance review and advice are free of charge.