Life insurance is an insurance policy that pays out a lump sum if you die. That's the simple bit, but people often have lots of other questions about the nuances – like where does the money go? What's the money for? What happens if your policy ends and you haven't died? How much will it actually cost? And so on. We're here to help answer those questions and get you the right cover in place.
How does life insurance work?
As we've already said, life insurance is an insurance policy that pays out a lump sum if you, the policy holder, die whilst you're insured. The lump sum goes to whoever you’ve named the beneficiary, which is usually your partner, children or family. You pay a monthly insurance premium to be covered by a life insurance policy and the lump sum is paid out if you die during your policy term – or, in some cases, if you’re diagnosed with a terminal illness and given less than a year to live.
When buying term life insurance, you choose how much cover you want (i.e. how much it would pay out if you die), what kind of policy you want (e.g. level or decreasing), and how long you want to be covered for (known as the policy term). The type of policy you buy determines how the policy pays out:
- If you buy a level term life insurance policy, it’ll always pay out the same amount if you die during your policy term
- If you buy a decreasing term life insurance policy, it’ll pay out gradually less over the course of your policy term (a cheaper option than level cover)
What if you've got life insurance but you don't die?
Life insurance is there to cover you in case the worst happens. If the worst doesn’t happen and you don’t die whilst you hold the policy, you won’t receive the lump sum payout. This is the same as buying many other kinds of insurance; it’s about weighing up the risks of not having any cover in place with the risk of having cover in place but not needing to claim on it. For many, the peace of mind having cover brings is the deal-breaker.
What’s the lump sum payout for?
The lump sum paid out by a life insurance policy is there to support the people you leave behind, giving you peace of mind that they’d be financially secure without you and your income. Lots of people use the money to:
- Pay off the mortgage
- Pay the rent
- Pay the bills and living expenses
- Pay for your funeral
- Maintain the family lifestyle
- Cover guardianship costs
- Pay school/university fees
Most people get enough cover to make sure their loved ones could always cover the essentials, so you know they wouldn’t struggle without you. You might even get a level of cover that ensures your family wouldn’t need to make any changes to their lifestyle and would always have money for holidays, hobbies, DIY, and so on. The level of cover you buy depends on what you need, as well as how much you can afford and are happy to spend on being covered.
Who needs life insurance cover?
The simple answer is: anyone with financial dependents. If you’ve got other people who’d be financially affected by you dying, it’s a good idea to have some life insurance cover in place to protect them. Often this means people with a partner or children, and joint financial commitments. Life insurance is also a way of covering debts, if you have them – most commonly, a mortgage, but sometimes smaller debts like car finance or personal loans – so you can be sure no-one else will be left liable for them if you die.
How much does life insurance cost?
Life insurance is often very affordable, but the price is always different per person. This is because it depends on:
- You and your lifestyle: including factors like your age, individual and family health history, smoking status, hobbies, etc.
- The cover you buy: including the amount, the type, how long you want to be insured for, and any other policy features.
For a rough idea of monthly premiums based on these factors, read our guide to the price of life insurance in the UK.