What is life insurance?
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 premium) in return for the lump sum, paid out after your death.
Depending on your personal circumstances and wishes, the money is passed either passed to your estate, or to your nominated person. This is usually 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 a life insurance policy, you have to decide:
- What kind of policy you want (known as the type)
- How much you're covered for (the amount)
- How long you're covered for (the term)
The type determines how the policy will pay out; the amount determines how much money the policy pays out; and the term determines how long you’ll be insured for. Based on these three, you’ll be quoted a price for your monthly premiums. This is how term life insurance works; we’ll cover whole-of-life insurance later in the guide.
What's the 'death benefit'?
The 'death benefit' is just the technical term for talking about when and how a life insurance policy pays out. For context, some policies come with a terminal illness benefit or critical illness cover, meaning the money would be paid out sooner than someone passes away – usually, if the person insured is diagnosed with a terminal or critical illness.
What's a life insurance payout for?
Life insurance is usually taken out to make sure your family stays financially secure if you die. It's often used to pay off any debts, pay for ongoing bills and expenses, and to cover funeral costs.
It's also a way of providing the money your family would need to do essential things. For instance, paying for living expenses like food and bills. If you're a single parent, you might need life insurance to ensure guardianship costs are covered, so your children can continue to be provided for until they can support themselves.
You might also use your life insurance to ensure future university or private school fees are covered for your children. Or so that any financial dependents you have would be able to maintain their everyday lifestyle. 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 – like holidays, hobbies, pets, and future home improvements, etc.
Do you have to pay tax on a life insurance payout?
Life insurance is unusual in that the policy is yours, but 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 it's taxed.
Well: it depends on how much the payout is and who receives it. If it’s your married or civil partner then it's tax-free. If it’s anyone else, it might be subject to inheritance tax, depending on the entire value of your estate.
Different types of life insurance
There are a few different types of life insurance. The most common kind of policy is term life insurance, which can either be decreasing or level – but there’s also a type of cover called whole life insurance. The main difference between the two is that one 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 insurance policy, you choose a fixed term that defines how long the policy will run. You pay a monthly premium for the duration of that term and, when the term of the policy ends, you're no longer insured.
The amount paid out decreases over time. That's why people often buy decreasing term insurance to protect a mortgage – as the amount there also goes down with time.
Level term life insurance
As with decreasing term insurance, a level term policy requires you to pick an amount of time that the insurance coverage will run for. The term is how long you'll pay the monthly premiums and how long you'll be insured. The difference with level term insurance is that the amount paid out always stays the same. It's usually a bit more expensive than decreasing term insurance, but it can be a useful kind of cover if you have an interest-only mortgage or want to leave a sum of money to your family if you die that doesn't decrease.
Whole of life insurance
Whole life insurance guarantees your partner or family a lump sum when you die, whenever that may be. This makes it a more expensive, longer-term type of cover. People often take out a whole life insurance policy if there are certain liabilities they know will arise after they die, like funeral costs or inheritance tax.
Family income benefit
Family income benefit is a type of term life insurance designed with families in mind. The main difference between this and other types of life insurance cover is that pays out a monthly amount if you die, instead of a lump sum. The idea being that, if you have a family, this would better help them cover the monthly expenses they’d still have if you were no longer around.
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, like a mortgage or car finance?
If one (or both) of these applies to you, then it's likely you have some sort of need for cover. 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.
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, a life insurance policy 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, a life insurance policy 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 insurance. 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?
Working out the right level of cover for you 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 life insurance. It's also why so many people turn to online calculators to get a rough idea of how much cover they might need, for how long.
The problem with using automated calculators is that there are lots of contextual variables they can't factor in – including age, health, lifestyle, plus your household setup and how many financial dependants you have.
To do that, we'd recommend talking to an adviser or taking Anorak's quick, free, online assessment. Based on what you tell us about you and your life, we'll do the maths and show you a detailed breakdown of your financial needs and how they could best be covered with different types of life insurance.
When should you get life insurance?
Most people don’t think about buying life cover until something changes to trigger the need for it – like buying a house or having children. This is totally understandable. Like any insurance product, you're unlikely to think about buying it until you actually need it.
But when it comes to life insurance, it tends to be a case of the sooner, the better. This is because it's an age-priced protection product. Simply put: the younger you are when you buy it, the cheaper it’ll be. The reason is 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 medical conditions that may affect your premiums.
Of course, 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 medical 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 cover usually comes in the form of whole-of-life policies, rather than a term life insurance policy. 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 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. It's unlikely to be as big as a term life payout, though.
People usually take out an over 50s or 60s life policy 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'd like to leave a little extra for their family. Either way, it's a more affordable, viable option for people to get some extra peace of mind at that stage of their lives.
How much does life insurance cost?
Several factors affect how much your life insurance policy will cost per month – some relating to you and others relating to the policy itself. These include your age, individual and family medical history, smoking status, and dangerous hobbies. As for the insurance, it's the amount of cover you buy, the type of policy, as well as its term and any additional features.
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.
As with any long-term financial commitment, you should always be sure you’ll be able to afford the monthly insurance premium payments before you buy. With life insurance, the main thing is to be sure the policy you buy covers everything you need it to. 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 many mortgage brokers tend to recommend it as an effective way of protecting it.
Whether you take it out or not is up to you, 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, meaning it's a debt people are keen to insure as soon as possible.
Our guide to life insurance for homeowners will help here.
How to compare life insurance providers
When buying any insurance product, people might want to stick to the insurance company they know. Other times, they just want to find the cheapest way to get covered. When buying life cover in particular, this isn’t necessarily the best approach because it’s a long-term insurance product. It's important to ensure a policy fully meets your needs before 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 you might choose to go with the insurance provider you’ve heard of at a competitive price you can afford. Some of the most common policy 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 health 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 your life expectancy is 12 months or less.|
|Guaranteed insurability||You’ll get the opportunity to increase your cover after certain life events, like getting married or becoming a parent. The list of included life events tends to vary per insurer.|
Below, we’ve rounded up ten of the most well-known life providers to show you how they compare in relation to the features above. You can also read our comprehensive 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 a policy, it's always good to review the level of your existing insurance 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:
- 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 like these may affect what you need financial protection for, hence their impact on your life insurance cover needs.
Can you have two life insurance policies?
Technically, you can have as many life insurance plans as you want, although most insurers will have a maximum sum they’re willing to insure per person.
A common reason for taking out more than one policy is if something changes while you already hold a policy that alters what you need to protect – like having children, for example. If your existing policy leaves you under-protected, some people may look to cancel their existing policy and 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.
Another reason you might have more than one policy is if you have cover through your employer – like death-in-service cover. Even if you have this, you might still look to buy your own policy if the amount covered 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.
Can you cancel your life insurance?
You can cancel your life insurance at any time. If you do so within 30 days of taking out your policy, you'll still be in the 'cooling-off' period, and you'll be refunded your first premium. If you cancel it after that point, you won't be refunded any premiums.
You should only cancel your life insurance after careful consideration. Cancelling it could leave you under-protected and you could find it more expensive to get covered in the future, since premiums go up as you get older. Conversely, cancelling could be the right option if you no longer need cover or buying a new policy works out better for your needs and/or budget.
If you're thinking of cancelling you existing policy, read our guide to cancelling life insurance first.
Is it easy to claim life insurance?
Claiming is straightforward. If you die while you're insured, your beneficiary needs to contact the insurer to inform them of your death and make a claim. There’ll be some paperwork to fill in and provide (e.g. a death certificate), but once that’s all sorted correctly, the insurer will pay out the money within days or weeks.
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. It’s important to make sure this is not the case by informing the relevant people about your policy and its details. 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.
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This guide to life insurance is intended for informative purposes only and does not constitute advice. Anorak is regulated by the Financial Conduct Authority.