What is life insurance?
Life insurance is a type of insurance policy designed to help cover your loved ones’ financial needs after your death. Most life insurance policies will pay out a lump sum of money if you die within the specified time period. This means that, regardless of your own financial situation, you can leave your family the money they need to use how they see fit, for example covering regular outgoings or using towards funeral expenses.
How does life insurance work?
Life insurance can help you protect your family after you’re gone, which means that policies pay out after you die. This money will usually be paid to the deceased’s estate and then managed through probate, unless the policy is written into trust with a named beneficiary in which case a lump sum would be paid out.
Remember - life insurance will only pay out if you meet the conditions set out in your policy, so make sure you understand these fully before making a decision. Some types of life insurance only cover you for a set number of years, while others may not cover deaths that result from a high-risk activity.
What does a life insurance cover?
Not all life insurance offers the same type of cover and the plan you need will depend on your personal circumstances. However, it’s common for most life insurance policies to cover the following:
- Deaths caused by serious illness (e.g. cancer, heart attack or stroke)
- Accidental deaths
- Suicide or intentional self-injury*
- Early payout for terminal illness when a policyholder has a life expectancy of less than 12 months
- Deaths outside of the pre-agreed time period
- Deaths caused by high-risk activities (e.g. skydiving or mountain climbing)
- Drug or alcohol-related deaths
- Any death when the applicant withheld or provided inaccurate information to their insurance provider
* Some types of life insurance may only cover suicide or intentional self-injury after an initial period of 12 or 24 months have passed since the start of the policy.
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How much does life insurance cost?
Life insurance is an important product, and it doesn’t have to be expensive. The cost of a life insurance policy can vary depending on a few things, including:
The type of policy you take out
Whole of life policies will be more expensive than term insurance, for example.
The length of the policy term
The longer the term, the more you'll pay overall typically (this can differ with decreasing term policies).
Other things being equal, it will cost more to take out life insurance as you get older.
The amount of cover you require
The higher you set your payout, the more your policy will cost. Additional cover will increase the cost further.
If you lead a healthier lifestyle, your life insurance will cost less.
Your lifestyle (including whether or not you smoke)
Smoking, or regularly partaking in dangerous activities, will increase the cost of your premiums.
Main types of life insurance
Choosing the right life insurance is important. There are different variations of life insurance cover available, each suitable for different situations and circumstances.
Level Term Life Insurance
A level term plan will pay out a fixed amount to your beneficiaries if you die within a set term. The term length is decided at the start of the policy, and the pay-out stays the same no matter how far into the term you get.
Terms can range from anywhere between 2-40 years, but 10-25 years is typical.
Level term life insurance tends to be more expensive than decreasing term cover, but it’s perfect if you want a policy that will ensure that your dependents are provided for financially until they can better take care of themselves.
Fixed payout value
Premium costs stay the same throughout the term
Perfect for paying off an interest-only mortgage
Decreasing Term Life Insurance
Decreasing term insurance policies are designed to help your dependents pay off a specific debt such as a mortgage. A term is set, as with level term cover, but the pay-out gets smaller as the term progresses, reflecting the size of the remaining debt. Decreasing term cover is also known as mortgage life insurance.
The term length should will be identical to the remaining term of your mortgage (or other debt). As the pay-out decreases over time, these policies tend to be cheaper than level term policies.
Perfect for paying off a mortgage
Cheaper than level term cover
Match the term with any existing debts
Joint Life Insurance
Taking out a joint life insurance policy is typically cheaper than taking out two single policies. Instead of the payout going to a chosen beneficiary, a lump sum will be paid to the other person on your policy if one of you passes away. However, once this happens, the other person on the policy will no longer be covered so the survivor will need to take out a new life insurance policy if they want to financially protect their loved ones.
The other person on your joint policy doesn’t have to be your partner – it could be another family member, a friend or a business partner. In the unfortunate event of both policy holders dying at the same time, the money will then be paid out to your chosen beneficiary, for example your children.
Cheaper than two separate policies
If one of your dies, the payout goes to the other
Partner can be anyone including a friend or business associate
Critical Illness Cover
Critical illness cover is an insurance product designed to protect you in case you become seriously ill and cannot work. What is classified as ‘seriously ill’ may vary between insurers, but often covers around 40 critical illnesses such as heart attack, stroke and cancer. Critical illness cover can be added to a term life insurance policy so it becomes a life and critical illness policy. This means the policy will pay out for either death or critical illness, but it will only pay out once – so if you claim for critical illness, the policy will end and you will have no cover left to claim again for additional critical illness or death. Critical illness can also be sold as standalone cover, which will only ever pay out for diagnosis of one of the listed illnesses and will never cover death. Not all the brokers we work with offer standalone critical illness.
Pays out if you are diagnosed with one of the illnesses listed in the policy
Helps cover outgoings while you can’t work
Can help pay for private medical care
Family Income Benefit
Unlike traditional life insurance policies, which pay out a single lump sum, family income benefit (FIB) policies pay out a regular tax-free income to your beneficiaries. When you take out the policy, you decide on the monthly income, and on a policy term. The pay-out lasts from when you die until the end of the term. For example, you might decide that your children need £2,000 a month for the next 20 years and so take out a policy accordingly. If you die after five years, then your children will receive £2,000 a month for the remaining 15 years.
Family income benefit is often among the cheaper forms of life insurance, and so is great for the budget-conscious. It also helps beneficiaries manage the money they receive better, ensuring a guaranteed amount over a set period, rather than providing a large lump sum in one go.
Pays the value of your monthly income to your family
Functions similar to term life insurance
Often cheaper than standard life insurance
Over 50s life insurance is a specialist type of cover that's aimed at catering for end-of-life costs, such as funeral expenses. These are 'whole of life' policies, which means they will pay out whenever the policyholder dies. This is different to term life insurance policies, in which the policyholder will receive no pay-out if they die just one day after the term ends. However, the higher chance of a pay-out with over 50s policies mean they typically charge higher premiums.
You also get 'guaranteed acceptance' with over 50s policies, which means that every applicant will be accepted even without the need for any medical questions or examination. This makes them a great choice for people with pre-existing conditions who may be struggling to find cover elsewhere, although they usually come with a 1–2-year qualifying period before you can make a claim.
Guaranteed acceptance no matter your medical status
Whole of life cover - provides a payout whenever you die
Can be used to cover funeral costs or lost savings/pensions
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How can life insurance help you and your family?
Life insurance can offer an important helping hand to any financial dependants you have should you pass away. The payout will help cover general expenses like bills or food shopping that you might have been responsible for. But life insurance policies are often taken out to cover debts or expenses like mortgages or funeral costs.
If your family would struggle to keep up with mortgage payments without your income, most policies will ensure they don’t lose their home if you pass away. Decreasing term policies are designed to cover specific debts like this.
Loss of Income
If you have any dependents that rely on you for day-to-day living expenses, then a level term policy that pays out a fixed lump sum in the event of your death can be an important source of peace of mind
If you want to ensure that your family can meet funeral or burial expenses following your death, you can seek out dedicated funeral cover policies. The average funeral in the UK cost £3953**.
**SunLife's annual Cost of Dying Report for 2023 shows that the average cost of a UK funeral in 2022 was £3953
Your Children's Education
A life insurance policy can help you make sure there is money available for your children’s future, even if you are not there to see it.
Check out our life insurance guides
We endeavour to keep our users fully informed when it comes to taking out a life insurance policy. Please read through our handy guides to find the information you need.
Life Insurance FAQs
Should I consider life insurance?
Life insurance can be a very important consideration for most people who want to make sure that they have put measures in place to provide their loved ones with financial security in the event of their death. Loved ones can use the lump sum to help pay off debts, including things such as the remainder of your mortgage. It can be used how they see fit, so could contribute towards your funeral or help to cover everyday expenses.
Having said all of this, life insurance is not necessary a worthwhile investment for everybody. If you are somebody who does not have any financial dependants and you are single, you may not want to spend your money on something that will only yield benefits when you are no longer around to reap them. In a similar way if you have children but they are of an age where they can provide for themselves financial and no longer rely upon you for their wellbeing or accommodation, there may be no real need for you to commit to this financially.
Do employers offer life insurance?
There are many employers who offer what is referred to as a death-in-service benefit. This death-in-service benefit is a payment that your family will receive from the company that employs you, if you die whilst still being employed by them. This benefit will come in the form of a lump sum and normally equals about four times your yearly salary. This can sometimes be enough to help your family with the immediate financial burden that they will be placed under but you may want to take out some extra cover depending on what you need.
How does term life insurance work?
Term life insurance is the most commonly chosen form of policy and is the most affordable - when compared to life assurance. This works on the basis of deciding on a set period and covering you for that - this time period is what is referred to as the term. This means that if you agreed upon plan lasted for a 20-year term, you would be covered for that period and if you were to die, your family would receive a payout. Once the agreed upon term has finished, your cover will expire and your family will no longer receive a payout in the event of your death.
How does your payout change over time?
The answer to this question changes depending on the type of insurance policy that you take out. If you take out a level term insurance policy, the amount that you receive as a payout will stay the same no matter when you die - provided you die within the term of the policy.
You also have the option of taking out a decreasing term life insurance policy, these policies give a lower payout the longer that the policy goes on for. This means that if you were to die in the first year of your policy, your family could receive something like £150,000. If you were to die in the last year of your policy, your family would receive a much lower sum. The main reason that people take out decreasing term policies is to cover their outstanding debts in the event of their death. Things such as mortgages will be paid off as time passes and you move through the term therefore your family will need less money to finish its payment the later your insurance pays out.
How long should I get cover for?
This is question that purely depends on your own, personal situation. Some people decide to choose a term that will last until their children have reached the age of 18 whilst others choose a term that will go until their children have finished university. It really just comes down to what you want to get out of your life insurance plan. You should also take your age into account when making this decision as that will affect the amount that you pay for your policy.
What do I do if I want a payout to be guaranteed?
Some people would like to choose a plan that will make a payout regardless of the time of their death. Fortunately, this is possible to achieve by taking out what is referred to as a whole of life assurance policy. This then means that the payout your family receives will not be dependent on when exactly you pass away. One thing to bear in mind if you do decide to go down this avenue is the fact that the cost of whole of life assurance is normally quite a lot higher than normal term life insurance.
Will my life insurance premiums change throughout the policy?
The majority of life insurance plans offer what they refer to as "guaranteed" premiums, this means that the amount that you pay is fixed throughout the entirety of the plan and you don't need to worry about them changing unexpectedly. This is worth checking in the fine print before you sign up, because not all of them have "guaranteed" premiums. Some plans will have what is referred to as "reviewable" premiums, these reviews normally result in price rises since that you will be older than you were when the insurance plan started.
How much should I expect to pay for life insurance?
The cost of different life insurance policies vary a lot depending on what form of plan you are taking out and also on how large you want the payout to be. As with all forms of insurance, providers are essentially betting against you making a claim. This means that if they view you as a higher risk candidate, they will charge you more for insurance than they would somebody who was at a lower risk. This means that if you are somebody who is in great physical shape and leads a healthy lifestyle, you can expect to pay slightly lower rates on your premium than somebody who is not. They also take age into account when deciding upon the cost of your plan, as a general rule the older you are the more expensive the plan will be however there are other factors taken into account. If you are a smoker, quitting will lower the rates that you need to pay.
Can I get life insurance if I am already ill?
Some people find it difficult to take out life insurance if they have already been diagnosed with a serious medical condition as there are many insurance companies who will not allow policies to these people. There are however some companies that will still allow you to take out an insurance policy at a higher premium. There are other companies that offer policies which exclude cover for the disease you have been diagnosed with but will cover you if you die from a cause that is unrelated to it. You should check with an insurance company directly to find out exactly what is covered by the policies they offer, this way you can find out if the plan is relevant to you or not before you sign up to it.
How does age affect life insurance prices?
There is a general rule that applies to pricing in relation to age, and that is that the older you get the more expensive your premium will be. The reason for this is straightforward - that the older you are the shorter your life expectancy and therefore the likelihood is higher that you will pass away whilst on the plan.
However, age is not the only thing that your insurer will take into account. They will also consider things such as your general health and lifestyle so it is important to focus on these things especially if you are older and looking for an affordable policy. There are still a lot of insurers who will cover somebody over the age of 50 and some of them will even do this without requiring a medical first.
What if I want to insure my partner too?
There are many couples who are now opting to take out what are known as joint life insurance policies that offer shared protection between partners. This offers the benefits of being less complicated because you are required to fill out half as much documentation. They are also considerably cheaper than the alternative of taking out two separate policies - one for each of the individuals. However, when considering one of these policies, it is important to remember that they work on a first death basis when it comes to paying out. This means that the policy will only payout on the first death out of the two policy holders. This will leave the second partner without cover and facing the prospect of higher premiums when taking out a new policy due to their increased age. To learn more about whether a single or joint life insurance policy is right for you, take a look at our helpful guide.
Do my family need to pay tax on the payout?
The payout that your family receive as the result of your life insurance will not be taxed by capital gains or income tax. However, there is a chance that it may fall under inheritance tax in some situations. This can be easily avoided if you make sure that when you are writing your policy it is written "in trust". Writing it up "in trust" allows the payout to go straight to your dependents without being in anyway affected by inheritance tax.
How much life insurance cover do I need?
To work out how much cover you need you should work out exactly what you need it for. If you’re taking out a policy so that your dependants can pay off your mortgage when you die, then you should take out a decreasing term life insurance policy with the same value as your remaining mortgage debt.
Otherwise it’s worth trying to add up roughly what you spend regularly on behalf of your dependants. If your children are younger, then you’ll likely want to opt for more cover than if they’re older, when they’re more likely to be financially independent. Read our guide on family cover for further info.
How long should my term be?
This also depends on your reasons for taking out your cover. If your priority is to find a policy that will help your dependants cope with any debts you leave after you pass away, then you should time your policy accordingly. If the debts will be paid off within 10 years, you probably don’t need your policy to last much longer than that.
It might be the case that even when your debts are all paid off, your children might not be old enough to be fully financially independent. In this case, you might want to extend the term of your life cover until they are. If you have very young children, then you may want to get a considerably longer term than somebody who has children who are already in their 20s.
Is critical illness cover included in life insurance?
Critical illness cover is usually available as a life insurance add-on, meaning you may have to pay extra for it or request it specifically from your provider. However, if your critical illness policy is combined with your life insurance, rather than added on as an extra, you may only be eligible to receive a single payout. This means that if you need to use your critical illness cover while you’re still alive, you would need to get a new life insurance policy if you still want cover when you die. Already have a life insurance policy? You may be able to add critical illness cover depending on your provider. Not all the brokers we work with offer standalone critical illness.
Will life insurance pay for my mortgage?
Life insurance can help your family to cover your mortgage after you die. However, you need to make sure you take out the right amount of cover to make sure the final payout is enough. Different types of mortgages may also require different types of cover. For example, homeowners with a repayment mortgage often opt for decreasing term life insurance, while those paying an interest only mortgage may benefit more from level term cover. If your mortgage is a particular concern, you can consider taking out mortgage life insurance instead of a more general policy.
Will my life insurance definitely pay out?
If you meet all the terms and conditions laid out in your policy, your life insurance should pay out. However, sometimes life insurance claims are denied if you didn't provide the right information when you took out your policy, or you failed to inform your insurer of a change in your health. Make sure you fully understand exactly how your policy works and adhere to all the rules it sets out for the best chance of securing your payout.
Why does my life insurance cost more than it used to?
Your life insurance costs may increase over time due to the type of policy you have or changes in your personal circumstances. For example, increasing life insurance policies provide you with more cover over time, so your premiums may go up as well. Similarly, if you’re diagnosed with a health problem, your life insurance provider may see you as more of a risk and increase your costs accordingly. If you’re concerned about the affordability of your life insurance, it may be worth comparing quotes from other providers to find a policy that better works for your needs.
Does life insurance pay out a lump sum?
Many types of life insurance pay out a lump sum of money, but this is not always the case. If you’d prefer your family to receive smaller instalments of money, you could consider getting family income benefit. This type of life insurance pays out a regular monthly amount to help your loved ones cover day-to-day expenses. Similarly, having income protection insurance on top of your life cover could provide you with regular payments to replace your income if you were no longer able to work. This is different to critical illness and terminal illness cover, which both typically pay out as a lump sum.
Last reviewed: 1 February 2024
Next review: 1 March 2024