Life insurance: the main types, writing it in trust and answering questions honestly

Life insurance pays a sum when the person insured dies. This guide explains term and whole of life cover, how a trust can keep the payout out of the estate for Inheritance Tax, and what the law says about application answers.

What life insurance is and the main types

Life insurance is a contract in which an insurer agrees to pay a lump sum, called the sum assured, to named people if the person covered dies. The Financial Conduct Authority (FCA), the regulator for the sector, groups these policies under the heading of pure protection: cover that pays out on a defined event and has no savings or investment fund attached. Most protection policies are medically underwritten, which means the applicant answers questions about their health and medical history so the insurer can decide whether to offer cover and at what price.

Term assurance covers a fixed period, such as 10 or 25 years, and pays only if death occurs within that period. In its level form the sum assured stays the same throughout. In its decreasing form the sum falls over time, and the FCA notes this is commonly paired with a repayment mortgage so that cover reduces in line with the outstanding loan. Variations include increasing cover, which usually rises with inflation, and family income benefit, which pays a monthly income instead of a lump sum.

Whole of life insurance covers the policyholder for their lifetime and pays out whenever death occurs, provided the policy is still in force. Premiums normally continue for life, although some policies set an age after which payments stop and cover carries on. A related product, the guaranteed-acceptance over-50s plan, does not ask health questions but usually has a waiting period of 12 or 24 months, during which most insurers refund the premiums paid rather than the full benefit if the person dies. Many policies add a terminal illness benefit, paying the full death benefit early if life expectancy is under 12 months.

Related cover that is easy to confuse

Critical illness insurance is separate: it pays on diagnosis of a listed condition, not on death. Income protection replaces part of regular income, typically around 50% to 70% according to the FCA's study, if illness or injury stops someone working. It can be worth checking exactly which event a quoted policy covers.

Life insurance and Inheritance Tax

Inheritance Tax is charged on the value of an estate above a threshold. As of 19 October 2026 GOV.UK gives the standard threshold as £325,000 and the standard rate as 40%, charged only on the part above the threshold. Reliefs and exemptions exist, such as those for a surviving spouse or civil partner, but this guide does not cover them.

HMRC's Inheritance Tax Manual explains the starting point for a policy on the policyholder's own life that they also own: if the person insured dies while the policy is in force, the proceeds form part of their estate and so can be taxed on their death. The same manual says settled policies, meaning those placed in trust, are normally treated like other settled property. The FCA's market study makes the practical point that writing a policy in trust can mean the proceeds are paid outside the estate, managed by trustees for the named beneficiaries, which is why the choice sometimes comes up alongside a will. Trust details vary, so they are worth confirming with the insurer or a solicitor.

A worked example

Illustrative figures, ignoring every relief: Suppose someone dies with an estate of £400,000 excluding a £200,000 life policy that they owned themselves and did not place in trust. With the policy, the estate is £600,000. The amount above the £325,000 threshold is £600,000 minus £325,000, which is £275,000, and 40% of that is £110,000. Now suppose the same policy had been held in a suitable trust and so sat outside the estate. The estate is £400,000, the amount above the threshold is £75,000, and 40% of that is £30,000. The difference is £110,000 minus £30,000, which is £80,000, and that equals 40% of the £200,000 policy.

Answering application questions honestly

In Great Britain and Northern Ireland, the Consumer Insurance (Disclosure and Representations) Act 2012 sets the rules for what a person must do when taking out or renewing a personal insurance policy. The duty is to take reasonable care not to make a misrepresentation, meaning not to give an inaccurate answer to the insurer's questions. The Financial Ombudsman Service, which resolves complaints about insurers, says that whether a person took reasonable care depends on the exact question asked and the person's circumstances at the time. A person who is unsure of an answer is generally expected to try to find out. If reasonable care was taken, the insurer cannot take action even where an answer turns out to be wrong.

The insurer must also show that the inaccurate answer made a difference, meaning it would have offered the policy on different terms or not at all. The remedies then depend on the person's state of mind. Under Schedule 1 of the Act, where the misrepresentation was deliberate or reckless the insurer may treat the contract as void and refuse all claims. Where it was careless and the insurer would have declined to insure, it may avoid the contract but must refund the premiums. Where it would have charged a higher premium, it may reduce the claim payment proportionately.

A proportionate claim example

Again the figures are illustrative. Suppose a careless error meant a policy was priced at £100 a month when the correct price, had the question been answered accurately, would have been £150. The Ombudsman's own example treats this as two-thirds, since £100 divided by £150 is two-thirds. If the sum assured is £60,000, a proportionate settlement would be £60,000 multiplied by two-thirds, which is £40,000. A person who disagrees with an insurer's decision can complain to the insurer and then to the Financial Ombudsman Service.

Where to get free help

MoneyHelper, the free government-backed money guidance service, publishes plain-English explanations of life insurance, and the Financial Ombudsman Service handles complaints about insurers. This guide is general information and does not suggest what any person should buy or whether cover is needed.

Check before you act

Rules, thresholds and policy terms change, and a particular policy's wording matters more than any general description. Please confirm the figures and rules on the official pages linked below, and read the policy documents, before relying on anything here.

Sources

• FCA, Structure of the UK pure protection market for retail customers (MS24/1.3, September 2025)
• GOV.UK, Inheritance Tax
• HMRC Inheritance Tax Manual, IHTM20012 Life policies and Inheritance Tax
• Financial Ombudsman Service, Misrepresentation and non-disclosure
• legislation.gov.uk, Consumer Insurance (Disclosure and Representations) Act 2012, Schedule 1