Life insurance basics: level or decreasing term, trusts and the over-50s trap
The main types of life cover, why writing a policy in trust matters and how income protection differs from critical illness
Life insurance is simple in principle: you pay a monthly premium and, if you die during the term, your family gets a lump sum. The decisions that matter are the type of policy, the amount, how long it runs and who legally receives the money. This guide explains the main options without recommending any product. Information only, not personal advice.
Level term versus decreasing term
Term insurance runs for a set number of years. If you die within the term, it pays out. If you outlive it, it pays nothing and there is no cash value.
| Type | Payout | Typical use | Cost |
|---|---|---|---|
| Level term | Same sum throughout | Replace income, cover children's years | Higher |
| Decreasing term | Falls each year to zero | Clear a repayment mortgage | Lower |
| Family income benefit | Monthly income until end of term | Ongoing household costs | Often lowest |
Decreasing term is cheaper because the sum at risk shrinks in line with a repayment mortgage balance. If you have an interest-only mortgage, the balance does not fall, so decreasing cover would leave a shortfall.
A common approach is to work out what your household would need: the mortgage, plus enough to replace lost income until the youngest child is independent, minus any death-in-service benefit from an employer. Many employers pay two to four times salary; check your scheme booklet.
Writing the policy in trust
By default, a life insurance payout goes into your estate. That has two consequences. It can be counted for inheritance tax if your estate is above the thresholds, and it cannot be paid until probate is granted, which can take months.
Writing the policy in trust means the payout belongs to the trust, not the estate. It goes to the named beneficiaries directly, usually within weeks, and normally sits outside inheritance tax. Insurers provide the trust forms free of charge, and it can be done at the start or later. Joint policies and policies bought to cover a mortgage are the ones most often left out of trust by mistake.
The over-50s plan problem
Over-50s plans accept everyone in an age range without medical questions and pay a fixed sum on death. They are heavily advertised and simple to buy. The catch is the maths. Premiums are paid for life, or to a fixed age such as 90, and if you live a normal lifespan you can pay in far more than the plan ever pays out. Most plans also pay nothing except a refund of premiums if you die in the first one or two years.
If you are in reasonable health, a whole-of-life or term policy that asks medical questions will usually offer more cover for the money. Over-50s plans suit a narrow group: people who cannot get cover elsewhere and want a small guaranteed sum for funeral costs.
Income protection versus critical illness
These two are often confused and do different jobs.
Income protection pays a regular monthly income, typically 50% to 70% of your earnings, if you cannot work because of illness or injury. It pays until you return to work, the policy ends or you retire. It covers any condition that stops you working, not a fixed list.
Critical illness cover pays a one-off lump sum if you are diagnosed with one of the conditions listed in the policy, such as certain cancers, heart attack or stroke. The list and the definitions matter; a condition that is not on the list, or does not meet the definition, pays nothing.
For most working adults who rely on their salary, income protection covers the more likely event. Statutory sick pay is low and time-limited, and many employers pay full sick pay for only a few weeks.
Watch out for
- Answer every medical question fully. Non-disclosure is the main reason claims are refused.
- Premiums for term cover are usually guaranteed, but "reviewable" premiums can rise. Check which you are buying.
- Do not cancel an old policy before a new one is in force. Health changes can make new cover dearer or unavailable.
- Free guidance on protection insurance is available from MoneyHelper.