What is life insurance?
In simple terms: life insurance is an insurance policy that pays out if you die. When you buy it, you agree to pay a monthly amount – known as the life insurance ‘premium’ – in return for a lump sum, paid out after your death. Many life insurance policies will also pay out the lump sum early, if you're diagnosed with a terminal illness. Depending on your personal circumstances and wishes, the lump sum is passed on to either your partner, children, family, or whoever you've named as the 'beneficiary' – which means: the person or entity (e.g. a charity) you've stated should receive it.
How does life insurance work?
To buy life insurance, you have to decide on the following three variables: what kind of policy you want (known as the type), how much it covers (the amount), and for how long (the term). The type determines how the policy will pay out; the amount determines how much the policy pays out; and the term determines how long you’ll be insured for. Based on these three things, you’ll be quoted a price for your monthly life insurance premiums. Please note: this is how term life insurance works; we’ll cover whole-of-life insurance later in the guide.
What does life insurance cover?
Life insurance is usually taken out to support your family’s financial needs after you die, especially in cases where their fundamental way of life is dependent on your income. Life insurance is a way of providing the money your family would need to do essential things like keep a roof over their heads and continue paying for living expenses like food and bills if your income was suddenly missing. If you’re a single parent, meanwhile, life insurance is a way of making sure essential guardianship costs are covered, so that your children can continue to be provided for until they reach an age at which they can support themselves.
This is the minimum you might choose to do with life insurance – but it could also cover even more if you wanted it to. You might use it make sure future university or private school fees are covered for your children, for example. Or to make sure any financial dependents you have would be able to maintain their everyday lifestyle if you (and your income) were no longer around. Or simply to cover anything that contributes to the way you live today and the way your family might continue to live in the future – so not just the bare essentials, but other things like holidays, hobbies, pets, future home improvements, and so on.
Do you have to pay tax on a life insurance payout?
Life insurance is unusual in the sense that although the policy is yours, it’s claimed by someone else after you’ve died. It’s also paid as a lump sum – so it’s understandable that you might have some questions around whether or not the payout is taxed. The simple answer is: it depends how much the lump sum is and who it's received by. If it’s your married or civil partner then no, it won't be taxed. If it’s anyone else, then it might be subject to inheritance tax, depending on the entire value of your estate.
Different types of life insurance
The most common type of life insurance is what’s called ‘term life’ insurance (which can either be decreasing or level) – but there’s also a type of cover called ‘whole of life’ insurance, so it can sometimes be confusing to know what to go for. The main difference between these two kinds of policies is that one type covers you for a fixed amount of time, while the other covers you indefinitely, until you die.
Decreasing term life insurance
When you buy a decreasing term life policy, you choose a fixed term that defines how long the policy will run for (e.g. 10, 20 or 30 years). You pay a monthly premium for the duration of that term and, when the term ends, you’re no longer insured. The lump sum paid out with this type of policy decreases over time. That’s why people often buy decreasing term life cover to protect something like a mortgage – because the amount you owe on a mortgage also goes down with time.
Level term life insurance
As with decreasing term cover, a level term life insurance policy requires you to pick an amount of time (known as the ‘term’) that the policy will run for. The term is how long you’ll pay the monthly premiums for and how long you’ll be insured for. The difference with level term cover is that the lump sum paid out always stays the same. For this reason, it’s usually a bit more expensive than decreasing term life insurance, but it can be a useful kind of cover if you have an interest-only mortgage, or if you want to leave a lump sum to your family if you die that doesn't decrease.
Whole of life insurance
The main difference between whole of life and the term life insurance we’ve described above is that this kind of cover is for life – literally. It guarantees your partner or family a lump sum when you die, whenever that may be – not just if you die within a pre-agreed, fixed amount of time. This makes it a more expensive, longer-term type of cover. People often take out a whole of life policy if there are certain liabilities they know will arise after they die, like funeral costs or inheritance tax.
Do you need life insurance?
The easiest way to answer this question is to ask yourself: do you have another person (or people) relying on you financially? Or do you have a big financial commitment? If one (or both) of these applies to you, then it’s likely you have some sort of need for life insurance. This is because your financial dependents or beneficiaries could be left liable for your outstanding debts if you died – or they could be left unable to maintain their lifestyle in the future without your income. Depending on your personal circumstances, it could be that a different protection product better suits your needs – like income protection or critical illness cover – but the most common reasons for needing life cover are:
|Because you've got a partner.||Partners tend to rely on each other financially – with shared plans for the future, shared financial commitments, or shared debt. If you’ve got a partner, life insurance is a good way of protecting the future you’ve planned together. It means one partner would be able to cope financially, keeping up with the everyday expenses fundamental to your current and future lifestyle, if the other were to die.|
|Because you've got children.||Naturally, children are financially reliant on their parents, so life insurance can be a way of supporting them until they reach an age where they can support themselves. If you have a partner, life insurance can provide the extra funds needed to support your children if your income was missing. If you’re a single parent, on the other hand, it can cover the amount needed for a legal guardian to raise your children in your absence. In either case, it could also be used to cover the cost of education, including private school and university fees.|
|Because you've got a mortgage.||This is one of the most common reasons for considering whether or not you need life insurance – not only because a mortgage is usually the biggest debt you’ll ever take on (and the biggest asset you'll ever have). Protecting your mortgage means, quite literally, protecting your home – so that if you have a family, they’d be able to carry on living in it if you died, or so that it could be passed debt-free on to other loved ones.|
Do you need to use a life insurance calculator?
Buying life insurance is complicated because of all the maths and what-ifs. This is why so many people put it off – or assume they need the help of a financial adviser to buy it. It’s also why so many people turn to online life insurance calculators in an attempt to get a rough idea of how much life insurance they might need, for how long. The problem with using automated calculators is that it there are lots of contextual variables they can't factor in – like your age, health and lifestyle, plus your household setup and how many financial dependents you have.
When should you get life insurance?
Most people don’t think about buying life insurance until something changes in their life which triggers the need for it – like buying a house or becoming a parent. This is totally understandable. Like any insurance product, you’re unlikely to think about buying it until you actually, strictly speaking, need it.
But when it comes to life insurance, it tends to be a case of: the sooner, the better. This is because life insurance is an age-priced protection product – which generally means that the younger you are when you buy it, the cheaper it’ll be. The (unfortunate!) reason being that the older you are, the more likely you are to die and, therefore, the more risk you pose to the insurer in terms of having to pay the policy out. You’re also more likely to have developed a health condition that may affect your life insurance premiums – so you should always keep in mind that premiums are cheapest when you’re young, fit and healthy.
You can still apply for life insurance if you're older or have a health condition – just bear in mind that it's likely to be more expensive, and there may be fewer insurers willing to cover you. If you've got a health condition, read our guide to buying life insurance with a pre-existing medical condition.
Is over 50s and over 60s life insurance worth it?
Over 50s and 60s life insurance usually comes in the form of whole-of-life policies, rather than term life policies. This means a policy that’s guaranteed to pay out when you die, whenever that is, rather than if you die within a pre-agreed period of time. Unlike other life insurance policies, over 50s and 60s cover is not always medically underwritten, so there’s often a limit to how much the policy will pay out. For reference: it’s unlikely to be as big as a term life lump sum.
People usually take out over 50s or 60s protection to cover particular costs they know will arise after their death. This could be things like funeral expenses or outstanding debts that members of their family could be left liable for. Others take it out simply because they want to leave a little extra for their family. Either way, it’s a more affordable, viable option than term life insurance for people at that stage of their lives to get some extra peace of mind about their family’s financial future.
How much does life insurance cost?
Several factors affect how much your life insurance policy will cost per month – some relating to you and your life, and others relating to the policy itself. These include things like your age, individual and family health history, smoking status, and dangerous hobbies; and as for the policy, it's the amount of cover you buy, what type, for how long – as well as what features are included in the cover. All of these factors combined will determine how much your monthly premiums will be.
Is it okay to buy cheap life insurance?
One of the great things about life insurance is that, more often than not, it’s a highly affordable way to protect the things that really matter in your life. Hundreds of thousands of pounds worth of cover can start from as little as £5/month, though that price will vary based on a number of factors regarding you and your lifestyle – including things like your age, individual and family health history, and smoking status.
As with any long-term financial commitment, you should always be sure you’ll be able to afford the monthly insurance premiums before you buy. With life insurance in particular, the main thing is to make sure the policy you buy covers everything you need it to – whether that’s your mortgage, other outstanding debts, or the ongoing financial needs your family would still have if you died. Beyond that, life insurance policies tend to be quite similar, so it’s absolutely fine to go with your cheapest quote if that suits your budget.
Do you need life insurance to take out a mortgage?
In the UK, it’s not compulsory to buy life insurance when you take out a mortgage – but lots of mortgage brokers tend to recommend life insurance as an effective way of protecting your mortgage. It’s up to you whether you take it out or not, but taking on a mortgage is one of the most common triggers for getting covered. This is because a mortgage is usually the biggest sum of money someone ever borrows in their lives, so naturally it’s a debt people are keen to insure as soon as possible.
How to compare life insurance providers
When buying any insurance product, people can have a tendency to stick to the insurers and providers they know or already use. Other times, they just want to find the cheapest way to get covered. When buying life insurance in particular, this isn’t necessarily the best approach because it’s a long-term insurance product. That’s why it’s super important to make sure that a policy fully meets your needs before you commit to buying it.
All of this is why you should always familiarise yourself with the policy details (including any additional features and/or exclusions) first and foremost – then, by all means, you might choose to go with the insurer you’ve heard of at a competitive price you can afford. Some of the most common life insurance features you can look at to compare policies include:
|Life insurance policy feature||What it means for you|
|Guaranteed premium||You’re guaranteed to pay the same monthly amount (known as the insurance ‘premium’) for as long as you hold the policy.|
|Waiver of premium||You’ll be able to pause your monthly insurance premiums if you’re unable to work for medical reasons. Different insurers will have different minimum thresholds for how long you need to be too unwell to work before the feature kicks in.|
|Terminal illness benefit||You can claim 100% of your lump sum early if you’re diagnosed with a terminal illness. Eligibility for this usually requires a doctor to say you have 12 months or less to live.|
|Guaranteed insurability||You’ll get the opportunity to increase your cover after certain life events, like getting married or becoming a parent, without further underwriting. The list of included life events tends to vary per insurer.|
Below, we’ve rounded up ten of the most well-known life insurers to show you how they compare in relation to the features above, but you can also read our guide to the best UK life insurance companies for more information:
|Guaranteed premium||Waiver of premium||Terminal illness benefit||Guaranteed insurability|
|Aegon life insurance||Included||If you’re off work for 6+ months||Included||Increase cover by £150,000 (max. 50% of cover amount)|
|AIG life insurance||Included||If you’re off work for 6+ months||Included||Increase cover by £150,000 (max. 50% of cover amount)|
|Aviva life insurance||Included||If you’re off work for 1, 3 or 6+ months||Included||Increase cover by £200,000|
|Canada Life life insurance||Included||If you’re off work for 3+ months||Included||Increase cover by £200,000 (max. 50% of cover amount)|
|Legal & General life insurance||Included||If you’re off work for 6+ months||Included||Increase cover by £200,000 (max. 50% of cover amount)|
|LV= life insurance||Included||If you’re off work for 6+ months||Included||Increase cover by £200,000|
|Royal London life insurance||Included||If you’re off work for 6+ months||Included||Increase cover by £200,000|
|Scottish Widows life insurance||Included||If you’re off work for 6+ months||Included||Increase cover by £200,000 (max. 50% of cover amount)|
|VitalityLife life insurance||Included||If you’re off work for 6+ months||Included||Not included|
|Zurich life insurance||Included||If you’re off work for 6+ months||Included||Increase cover by £200,000 (max. 100% of cover amount)|
What if you've already got life insurance?
Even if you’ve already got life insurance, it's always good to review the level of your existing cover to check that it’s still appropriate for your needs. If your policy has what’s known as a ‘guaranteed insurability’ feature, you may even have the option of increasing your cover after certain life events without further underwriting. This typically includes things like:
- Getting married or entering a civil partnership
- Becoming a parent
- Taking out a new mortgage or increasing your mortgage
- Getting a significant pay rise
Changes in circumstances like these may affect what you need for a number of reasons: you might be gaining financial dependents that you didn’t have when you took out your life insurance; you could be increasing the liabilities that would be left behind if you died; or you could be making significant lifestyle changes that you want to protect.
Can you have two life insurance policies?
Technically, you can have as many life insurance policies as you want, although most insurers will have a maximum sum they’re willing to insure per person, across one or more policies.
But you're probably thinking: why would someone need or want to take out more than one policy? A common reason is if something changes in your life, while you already hold a policy, that alters what you need to protect – like becoming a parent, for example, or increasing your mortgage. If it’s the case that your existing policy leaves you under-protected, some people may look to take out another one. However, if this happens, it can often work out cheaper and more effective to simply amend the terms of your existing policy, rather than buy an entirely new one. It’s also simpler from a life admin point of view – both for you to manage while you’re alive, and for your family to claim as and when they needed to.
Another common scenario for having multiple policies is if you have some sort of existing employer insurance – like death-in-service cover, for example. This normally works by paying an agreed multiple of your salary to your partner or family if you die while you’re still employed by the same employer, but you might still look to buy your own policy if this amount doesn’t meet all of your needs. Also, the sooner you buy your own life insurance cover, the cheaper it’ll be – so it may still be a good idea to get your own cover if you have death-in-service, particularly as the cover won't follow you if you change jobs.
How can you find lost life insurance policies?
Life insurance can sometimes go unclaimed. This is likely caused by it being such a long-term policy, so family members could be unaware that you even had a policy, or unaware of the policy details required to make a claim. It’s important to make sure this is not the case by informing the relevant people about your policy and its details – whether that’s your partner, children, or other family members. If this information gets lost, that’s not to say they won’t be able to make a claim – it’d just be a little more difficult and time-consuming, as the executor of your will would need to trace the policy through bank or employment records.
That burden can be alleviated in a simple, hassle-free way with life insurance – for the price of a TV subscription or a couple of coffees per month. What’s more, life insurance is money that’s easy to access, which can’t always be said for any other savings or assets you might leave behind.
If you have other people who rely on you financially, or a big debt like a mortgage – or any other kind of need to protect – life insurance is the simplest, most logical way to get covered.
This guide is intended for informative purposes only and does not constitute advice.