Money Expert > Life Insurance > Different Types of Life Insurance Policy
Have a look through our policies and choose the one that works well for you
Last updated: 01/07/2025 | Estimated Reading Time: 10 minutes
Life insurance allows people to take ease in the knowledge that their dependents will be financially supported in the case of their death.
There are a huge variety of life insurance policies that one can take out and trying to choose between them can often be overwhelming. Everybody's needs are different so it is important to understand how the different types of cover work before you compare life insurance policies and decide on one for yourself.
The two core forms of life insurance are "term" insurance and "whole of life" insurance.
Term insurance is the most commonly chosen type of insurance. This type of insurance will cover you for an agreed upon amount of time, after this time the policy simply stops and you receive no payment.
Whole of life insurance can also be referred to as whole of life assurance. If you take out this type of policy, you are assured of a payment at some point. As the name suggests, whole of life insurance covers you no matter when you die. The price for this type of insurance is normally higher than it would be for term cover.
There are a few different types of term insurance available and each has its own positives and its own set of drawbacks:
Level term insurance will give your dependents one predetermined lump sum if you pass away during the agreed upon term. This amount does not change over time and stays the same throughout the entire length of the policy. This type of insurance is called "level term insurance" because the amount stays at the same level throughout.
There are plenty of people who want an insurance policy that will not lose value over time due to rising levels of inflation. If you are one of those people, then you may want to consider signing up to an increasing term insurance plan. These types of plan are either tied to inflation to make sure that the real term value of the sum stays the same no matter the economical climate, or they increase by a fixed amount each year.
With these types of policies the sum total paid out increases each year but the premiums do so too, therefore it is important to be aware that the cost of this insurance will go up each year.
Decreasing term insurance is best for people who want their life insurance plan to be able to pay off an existing debt that will be decreasing over time. Debts like mortgages can be a huge burden for the dependents of those who took them out, should the borrower pass away.
If you decide to take out this form of insurance, the payout will decrease over time so the premiums will be lower than for other types of life insurance.
This form of life insurance is known as convertible term insurance. This name is given to term life insurance policies that allow its holder to change it to a whole of life policy if they so wish. Once you have taken out a convertible term insurance policy, you are entitled to change the length of your plan at any point - regardless of any change to your health or circumstances.
It is important to remember that even though you have the right to change your policy at any time, the premiums that you pay will probably go up. This is because by changing your policy to a whole of life plan, you are guaranteeing a payout on the plan at some point.
This type of insurance is known as renewable term life insurance. This refers to policies that allow the plan holder to renew their deal when the agreed term runs out. This means that the person being insured does not need to undergo a health review. There is however the possibility that the price of the plan may change over time so it is worth bearing this in mind when taking it out this form of policy.
This type of insurance has its price linked to the Retail Prices Index measurement of inflation. By taking out an index linked life insurance policy you can rest assured that your policy payout will not be lessened over time by the real price increases of daily living.
The name "joint life insurance" applies to insurance policies that cover more than one person. This type of life insurance is typically taken out by those who have close financial ties to a spouse or partner and who wish to take out one policy between them, as opposed to two separate ones. These types of policy will often have lower prices but this is because they only pay out once.
Joint life insurance policies operate on a "first death basis". This means that whichever of the two policy holders lives dies first will be paid out for. The sum of money goes to the second of the two and at that point the policy ends. Once this policy has ended, the second holder will have to take out a new one if they want to remain insured.
It is important to remember that if you want to take out a new policy after your initial one has ended, then your premiums may be much higher as you are likely to be a lot older.
This type of life insurance policy pays out its sum in the form of an income, instead of as one lump payment. This form of policy is normally cheaper than other forms of term life insurance. The reason for this is that the insurer will end up paying out less than they would on other policy types.
Whole of life insurance can also be referred to as life assurance. The reason for this is that when you take out this form of policy, you are guaranteed to receive a payout. Unlike like term insurance, whole of life insurance will cover you from the start of the policy until the end of your life.
Most policies of this form are split into two parts when it comes to payment. The premium is divided between the amount you spend on cover and the an amount that you invest. The reason for the investment is that this is intended to cover the cost of your insurance plan as you grow older and the premium gets higher as a result.
The downside of this is that if the investment does not grow as much as you had hoped, you may end up paying more on premiums anyway to cover the shortfall in the investment.
These types of policy are like term insurance policies in the way that there is no investment that goes alongside the payment for cover. Premiums do not change and a cash sum is paid when the holder dies.
The profits of these policies are dependent on how the investments within the fund perform. Premiums are invested together with the savings of other polcyholders and bonuses are then added dependent on performance; there is no guarantee that bonuses will be applied each year. Although the bonus value each year may fluctuate, there is usually a minimum final value (sum assured) which is added to any bonuses when a claim is made.
Your premiums buy units in one or more investment funds. The value of these units can go up or down in line with the investments that make up the fund, affecting the value that can be used to help pay for the costs of the life cover as the people covered get older.
Some policies have a Guaranteed Minimum Sum Assured amount, which means that your cover won’t reduce below an agreed amount as long as you continue to pay premiums.There are four main variations of whole-of-life cover
Maximum cover policies allow you to get a higher amount of cover for a lower initial premium. The premium is lower because more of it is used to pay the actual costs of your cover during the current review period, with nothing held in reserve to help meet increasing costs in later years.
When policy reviews start to take place, it’s normally necessary to increase your premiums in order to keep the same amount of cover. This is because your cover costs more as you get older and your policy is unlikely to have built up much of a fund to help with the increasing costs.
However, any changes in your health aren’t taken into account when working out the cost of your cover, as long as your premiums are maintained. This means that even though your premiums are increasing, the premium for a new policy could be even higher, depending on your health.
Standard cover policies start with a higher premium than maximum cover policies, but aim to maintain a more level premium throughout the life of your policy. The aim of the higher premiums is to build a sum of money in your chosen investment funds. This money is used to help meet the increasing costs of your cover in later years, reducing the need for your premiums to increase.
The level of growth achieved by this investment element can’t be guaranteed, so your premiums may still need to increase to keep the same level of cover. This is more likely after you reach age 65 (when life cover costs start to rise sharply), or once the value of your investment funds has been used up.
Low cost cover is a version of standard cover which is focused slightly more on the level of cover than building a value. It otherwise works in the same way as standard cover.
Minimum cover policies work the opposite way to maximum cover. The majority of the premium is invested with the aim of building a sum of money in your chosen investment funds. This money is used to help meet the increasing costs of your cover in later years, reducing the need for your premiums to increase.
As with standard cover, the level of growth achieved by the investment can’t be guaranteed, so your premiums may still need to increase during the lifetime of the policy. A Guaranteed Minimum Sum Assured is more likely to have an effect on this variation of cover.
These types of policy can be looked into after ten years by your insurer. The company can then decide to raise the cost of the premiums if they judge the circumstances to have changed significantly.
Some of the factors that could lead your insurance company to change the rate of your premiums are your health, life expectancy and your lifestyle.
Life insurance for over 50s are available to those aged 50-85 will generally have a much lower payout due to the increased age of the policy holders. People normally take out these policies in order to cover funeral costs. The prices of these plans are always fixed and over 50s plans can be taken out for up to £20,000 max cover amount.
It is important to be aware that with a guaranteed over 50s plan, you may pay more in premiums than the policy will pay out through the sum assured.
These plans are basically investment plans that come with life insurance included. They were once popular with people that were trying to pay an interest only mortgage. These policies are not as popular now because many of them have underperformed and left the holders short of money.