Life insurance exists to support your loved ones financially, if the unthinkable happens and should you die or receive a terminal diagnosis. What would happen to your family if you were no longer around is a major concern for anybody, particularly for those who are the primary source of income for their family and dependents.
Find out more about life insurance through the following sections:
- What is life insurance and how does it work?
- What cover does life insurance provide?
- Different types of life insurance policy
- What does it mean to put a life insurance policy in trust?
- Do I need life insurance?
- How much life insurance cover do I need?
- How much does a life insurance policy cost?
- How to find a life insurance provider
- Final thoughts & FAQs.
What is life insurance and how does it work?
Life insurance can help your family if you pass away or receive a terminal diagnosis. If either of these things happens to you during your policy, your life insurance could pay out a cash sum to your dependents. While it can’t help ease their suffering, it can reduce the financial burden and any financially related stress for your loved ones.
Life insurance is one of the more flexible insurance products on the market. It’s down to you to select the amount of cover you’d like and the term length of the policy. You can take it out under a single name or joint names, and usually have the option to pay your premiums either monthly or annually.
What cover does life insurance provide?
Each policy varies depending on the insurance provider. Typically, a life insurance policy provides the following cover:
- if you die within the length of the policy, your family will receive a payout
- if you’re diagnosed with a terminal illness, with a life expectancy of less than one year, you can usually receive a lump sum before you die, to help you and your dependents cope financially during such a difficult time. This usually only applies if a doctor has given you less than 12 months to live, though exact terms vary among providers
- often there is the possibility to add Critical Illness Cover either for free or as a paid extra, in the event you develop a critical illness that prevents you from working
- some policies may include an Accidental Death benefit.
Life cover ensures that your loved ones have the funds they need to fulfil their financial obligations if you receive a terminal diagnosis or pass away. There’s typically no obligation for your family to use the money in a certain way, but some of the intended purposes include:
- To pay the mortgage
- To go towards everyday living expenses, such as bills and food
- To cover children’s school fees or expenses.
Are there any key exclusions?
Many policies come with some significant exclusions. These might be to do with the circumstances surrounding your death, or factors that make you a high-risk person. Some typical exclusions include:
- taking your own life within the first year of the policy
- some illnesses. Many insurers provide a list of terminal illnesses they cover as well as a definition of what they consider a terminal illness. It’s a good idea to scrutinise this list before you take out a policy
- if your payments aren’t up to date, you won’t have cover
- those who work in a ‘high risk’ job or take part in ‘high risk’ leisure activities
- people with serious health conditions, such as diabetes or cancer
- heavy smokers
- death related to drug or alcohol misuse, involvement in war or terrorism
- death which is the result of gross negligence or a reckless act.
Many life insurance providers retain the right to cancel your policy or refuse to pay out if they find you had hidden material facts or lied when you applied for your cover. Make sure you provide all the information asked of you as honestly as you can.
Different types of life insurance policy
There are a wide range of life insurance policies on the market. Which one you go for will depend on your individual circumstances and the amount of cover you need. Broadly, there are five principal types of life insurance policy.
Level-term life insurance
A level-term life insurance policy typically pays out a fixed amount of money over a fixed period of time, both of which you specify when you buy. You might agree an insured sum of £200,000, for example, which your beneficiaries will receive if you die within the term specified by your policy, which might be 18 years. It can help cover any debts your dependents may have after your passing, such as an interest-only mortgage. If you are terminally ill, you will receive the payments. If you die within the chosen period, your beneficiaries will receive a lump sum.
Your premiums will either be guaranteed or renewable. Guaranteed premiums will remain the same throughout your policy, whereas renewable premiums may change if your insurer decides to increase their prices later on. The older you get, the more your premiums may increase, owing to the increase in risk for the insurer.
Decreasing term life insurance
This type of policy is also a fixed term policy but is designed for people whose financial commitments reduce over time. This might be the case for somebody repaying a mortgage, for example. As the payout reduces as time goes on, this type of insurance is generally cheaper than level term insurance. Many mortgage lenders insist that a life insurance policy of this kind is in place before they lend you the funds.
Whole of life insurance
When you take out a whole of life assurance policy, you generally pay a premium either monthly or annually. Your insurance provider will use some of the premium towards the upkeep of the policy and invests the remaining amount. Your cover exists for as long as you pay the premium.
This policy type uses an investment model, which makes it more complicated. There are two main types of whole of life cover:
- Balanced cover: this is sometimes known as standard cover. Your provider sets the premium at a sum high enough to remain fixed throughout the policy. Similarly, the payout remains fixed and will be a figure agreed when you sign up for the plan.
- Maximum cover: this cover usually starts out cheaper, as most of your payment goes on your policy rather than being invested. However, after a pre-arranged timeframe, your insurer will review your policy, and may increase your premium if they find you to be more of a risk.
Joint life insurance
This type of policy covers two people, but only pays out once. It’s therefore typically taken out by a couple, to ensure the financial security of the other if the first person dies during the policy term. The payment tends to be a lump sum, which the survivor receives when the other policyholder dies.
Something to note is that in a ‘first death’ policy, there’s no further cover for the survivor if the other policyholder dies. They will have to seek a new life insurance policy after the death of the first policyholder if they wish for further cover.
It is possible with some providers to take out a ‘second death’ joint life insurance policy, which works slightly differently. A second death policy can ensure the financial security of dependents of the pair, usually a couple, rather than each other. In these policies, a payout only occurs after the death of both policyholders.
Over-50s life insurance
These type of plans typically offer a smaller payout than other forms of life insurance, as you likely have fewer financial commitments and financial dependents the older you get. People usually take out an over-50s life insurance plan between the age of 50 and 80. Beneficiaries tend to use the payout towards things such as funeral expenses.
Your premium price is guaranteed, which can be comforting security, but if you live for a long time, there is the possibility that you will pay more into the policy than the policy pays out.
Which type of life insurance policy should I get?
Which type of cover you get is a personal choice. It depends on the amount of security you want and need, and many individual factors such as how much your dependents rely on you financially, your risk of dying and how much debt you have.
The attraction of a whole of life policy is that the payout is almost always guaranteed. This guarantee can provide a higher level of security for the policyholder, knowing that their loved ones will receive a fixed sum once they’re gone. A whole life policy tends to be more expensive, however. It is also worth considering that if you live to an elderly age, you may have fewer people financially dependent on you, which no longer requires as large a payout.
A decreasing term policy can be an excellent option for younger people. The younger you are, the less you will pay, and this amount will only decrease over time as you progress through your policy. Nearly a third of policyholders take out insurance during the ‘Mature Independent’ stage of their lives, which refers to the time when their children have flown the nest. Policyholders at this stage of their life typically pay premiums of around £25 a month. However, younger people typically pay almost £10 less a month, which will decrease further over time, meaning they can make significant annual savings by taking out their policy earlier.
Typically, joint-life policies tend to be cheaper, as two people are effectively sharing the same policy. It also tends to be more straightforward than a single person policy, as the payout automatically goes to the surviving partner. However, it is worth considering whether you both require a life insurance policy. If only one of you works, it may be redundant to insure you both for the same amount. Similarly, if one of you has a pre-existing medical condition, it could drive up both your premiums.
You also cannot divide a joint life insurance policy, if you and your partner split up. In most cases, you would need to cancel the existing policy and set up two new ones. As you will likely be applying for the new insurance at an older age, your premiums may be higher, too.
Over-50s life insurance can offer peace of mind to older people. Over-50s aged between 50 and 79 are guaranteed by most insurers onto a policy of this kind, regardless of their health or lifestyle. There’s no need to take a medical exam, or even answer any questions related to health. One drawback of this type of policy is that you typically need to have paid into the policy for a minimum period of time, usually one or two years, before the insurer will provide a lump sum when the policy holder dies. Many people on the younger side of the over 50s age bracket might consider term life insurance, instead.
Do I need life insurance?
Whether you need life cover depends on your personal circumstances. If you don’t have a partner or children or other dependents, you might not want to spend money on a life insurance policy. However, if you have a partner, spouse or children who depend on you financially, life insurance ought to be given significant consideration to ensure financial stability for your dependents if you were gone.
If you were no longer around, the loss of your income could create financial struggles for your surviving family and dependents. Life insurance therefore offers them some financial security to help them stay afloat during a difficult time and provide for their future. Many people with a mortgage on a family house also consider life insurance, to go towards the mortgage payments.
When should I consider getting life insurance?
As an adult, it’s never a bad thing to start thinking about life insurance. Most people tend to take out a new policy after a significant life event, such as having a child or moving house, when children or mortgage payments start to depend on you. However, you must remember that most insurers will not pay out in the first year or two of your policy term, known as the ‘qualification period’, so the sooner you take out a policy, the better.
Do I still need life insurance if my employer provides cover?
Aside from employers liability insurance, many employers provide a free ‘death-in-service’ cover, sometimes known as group life insurance. This kind of benefit will pay out a multiple of your salary to your family or loved ones, typically around four times your annual income, if you die while you are an employee of that company.
Although this is a significant company perk and can provide some peace of mind when it comes to looking after your family, you must remember that this benefit is only available while you are an employee at that company. If you leave the company years later and find yourself needing to take out a life insurance policy, your premiums will be considerably higher than if you had taken it out a decade before when you were younger and fitter. Most people tend to avoid relying on your company’s death-in-service cover as your only life insurance protection, particularly if you are the primary breadwinner in your household.
Investment bonds as an alternative to life insurance
If you’d rather not get life insurance but still want some financial coverage in the event of death or terminal illness. It is well worth exploring Investment bonds as an alternative, sometimes known as single-premium life insurance policies, are lump-sum investments of typically £5,000-£10,000, that can serve as a replacement to regular life insurance. Many people opt for investment bonds as they can be a tax-efficient investment option, where you can store your money and grow your investment. As with life insurance, they provide a payout when you die, which tends to be around 101% the value of your bond. You can add the returns to your initial investment or take them as an income while you’re still alive.
While investment bonds can be a brilliant way to grow your money, and be a smart way to invest, remember that the value of your initial investment can go down, as with all investments. The final payout, therefore, could be less than you paid in initially, so it is worth considering the pros and cons. Additionally, some policies will let you choose the funds and shares you hold in your bond, while other providers manage these for you.
How much life insurance cover do I need?
Again, how much cover you need depends on your specific circumstances. The more you want to take out, the more you will have to pay in premiums. That said, you don’t want to underestimate the amount of money your family needs, or you risk leaving them without enough.
Most providers tend to recommend that if you have children, you cover ten times the annual income of the primary breadwinner until the children have finished fulltime education. Ten times your yearly income may seem excessive, but it’s worth remembering that inflation can mean the payout is worth less in 10 years than it is now, a high insured sum can help to absorb the impact of inflation. The multiple of ten is only a rule of thumb, and many people take out less or more, depending on what they can afford to pay in premiums. Some things to consider when you choose a sum to insure are:
- how much would be needed to cover your mortgage
- how much your dependents would need to make up living expenses, including bills, childcare costs and other expenses
- remaining costs for which they rely on you, such as your children’s education costs
- anything that would incur extra costs if you weren’t around, such as if you usually take care of an elderly parent, you might want to factor in money to pay for a carer, or if you share the childcare with a partner, they may need to pay for extra childcare if you are no longer there
- any of your dependents’ future plans which rely on you financially, such as a child going to study at university.
To help you work out the above costs, you can use an online life insurance calculator, which asks you questions based on your income, mortgage payments and other expenses, and offers you a suggestion of how much cover to take out based on your personal circumstances.
How long should the term be?
If you’re mainly putting your cover in place because of your children, then the policy should last until at least the time that they are no longer reliant on you. Generally, this is considered the time up until they finish fulltime education. If you are planning to have more children, you may want to factor that in when taking your policy out. Estimate at what point these potential children will grow up, as this tends to be easier than trying to extend your policy later down the line and cheaper than taking out a new policy later on.
If you are taking out life insurance to cover a partner, it’s often advisable to choose a term length that covers your partner until they reach pensionable age. You can select any length of policy that suits you.
How much does a life insurance policy cost?
Varying factors play into how much you pay for a life insurance policy, including:
- the sum you are looking to insure – the higher the sum, the higher your premium tends to be
- the length of your policy. Longer policies typically mean higher premiums
- the number of bolt-ons you choose to add to your policy, such as a critical illness cover
- your risk to the insurer, including your state of health, medical history and other lifestyle factors.
Principal factors that come down to your health include your height and weight, your smoking habits and how much alcohol you consume, although providers work out the premiums they charge using different methods. As they all use different calculations, it’s a good idea to compare their policies. To obtain a quote, you will generally need to provide the following information:
- details about you: your name, date of birth, etc.
- details about your lifestyle: whether you are a smoker or use nicotine substitutes
- information about your health and medical history: details about your current state of health, past medical issues or any pre-existing medical conditions
- the length of cover you need (for example 18 years, or a whole life policy)
- how much protection you want (e.g. ten times your annual salary, or however much you decide you need)
- details of any joint policyholders, if you are looking to take out joint life insurance.
How to find a life insurance provider
Many insurers offer various life insurance products, whether these are level term plans, whole life assurance or decreasing term life plans. Getting life insurance is a personal choice and depends on an entire host of factors concerning your personal circumstances and those of your family.
Going directly to an insurer
Many insurance providers can offer quotes online in a matter of minutes. You can quickly find out what level of cover they offer, as well as key benefits and exclusions. If you need help choosing a type of life insurance cover, many providers have advisers who are happy to help over the phone.
Going through a broker
Getting life insurance cover can seem like a daunting task. There are hundreds of options available, and many people looking to take out a policy can feel a great deal of pressure to get the right deal to protect their family after they are gone. Brokers can offer experienced industry experts and can help you find a deal suitable for your personal situation.
It can be wise to use a broker from a cost perspective, too. Many brokers also have special relationships with multiple insurance providers, giving them access to far cheaper deals and more comprehensive cover than if you went to an insurer directly. While you might have to pay a one-off commission fee to the broker, they can potentially save you thousands over the lifespan of a policy.
Using a comparison website
Comparing life insurance policies yourself can be time-consuming and overwhelming. When you’re starting your search for a provider, it can be helpful to use a comparison website, which allows you to compare the products offered by various providers all in one place.
Not only can you compare providers, but most sites will also show you the different products offered by insurers, such as level-term life insurance or a whole life assurance plan. You will be able to see the benefits of each policy and have the option to filter your search results according to price or specific features.
Final thoughts & FAQs
It’s never nice to think about the worst-case scenario. While life insurance can’t ease anyone’s emotional suffering, it can protect your family and/or dependents from a loss of income and financial support for their future. Do you have more questions on life insurance? Check out some common queries relating to life insurance, below.
What does it mean to put a life insurance policy in trust?
If a life insurance policy is written in trust, it means a life insurance payout is legally kept separate from the valuation of your estate after you die. Many policyholders use this legal arrangement to protect their payout from inheritance tax. While an insurance payout is typically exempt from regular taxes, it can count towards the value of your estate. In this case, your beneficiaries could be liable to pay more inheritance tax on your estate after you die, which is currently 40% (20/21).
The insurance provider can place your policy in trust for you, at which point you appoint a trustee to oversee the proceeds of the trust, which will go to your chosen beneficiaries. It’s the trustee’s job to make sure the money you set aside goes to the people you want it to after you pass away – it is, therefore, imperative they’re somebody you trust, such as a close family friend or a trusted solicitor. This person should also be somebody you reasonably expect to outlive you.
There are two primary types of life insurance trust:
- Absolute trusts. These tend to be fixed, meaning you can’t make alterations to the beneficiaries or their share of the trust once it is set up. Absolute trusts are a good option if you don’t envisage any reason to want to change your beneficiaries – such as if your recipients are your children
- Discretionary trusts. These are more flexible trusts, where you don’t need to decide who your beneficiaries or how much they will receive when you set it up. You can usually add other trustees to the trust after you have set it up as well.
There are some advantages of putting your life insurance policy in a trust, aside from avoiding inheritance tax. First of all, it’s usually no more expensive to place your policy in a trust, and your provider will often help you set this up or provide resources such as templates to help you do this yourself. Secondly, payouts tend to be quicker as there’s no need to wait for the formalities of adding up and distributing your wealth and property, known as probate.
The principal disadvantage of placing a life insurance policy in a trust is that it can be difficult to make changes to it once you’ve set it up. Some policyholders have been known to inadvertently invalidate their trust after making changes to their policies. Should you divorce or separate from a partner named as a beneficiary, it can be difficult to amend the beneficiaries of the policy without invalidating your trust.
What if my family member’s insurer won’t pay out for a life insurance claim?
If you have made a claim for you or your loved one on a life insurance policy and the insurer refuses to pay for the claim, you may use the Financial Ombudsman service free of charge if you feel that the decision was unfair. This impartial service exists to fairly settle complaints and resolve disputes between consumers and businesses in the financial services sector.
What happens if I miss a payment on my policy?
One of the most important things to remember when it comes to a life insurance policy is that you are only covered if your payments are up to date. If you miss a payment, your policy is likely to lapse, meaning you won’t be covered if the worst happens. You also won’t receive any refund for previous payments in the event of a policy lapse, and it may negatively affect your credit score, so it is crucial that you keep on top of it.
If you are going to miss a payment, the best thing you can do is contact your insurance provider. Sometimes, they can offer a payment holiday, but you are usually required to make up all the missed payments at the end of the break. Providers may be able to offer alternative resolutions with you to stop your policy from lapsing, so it’s well worth getting in touch to see what they can do.
What is universal life insurance?
Universal life (UL) insurance is permanent life insurance that has low premiums. It’s similar to term life insurance but includes a savings aspect. The difference is that a UL insurance policy can accumulate cash value, either by earning interest based on the current market or the minimum interest rate, whichever is greater. Policyholders can access a portion of this accumulating cash value without affecting the guaranteed death benefit for the beneficiary.
Other benefits include flexible premiums. Additionally, policyholders can choose to skip payments if there is enough cash value to cover them, without risking a policy lapse. The drawback is that beneficiaries only receive a payout on the death of the policyholder, and the insurance company will retain any remaining cash value when the policyholder dies.
When should I review my life insurance cover?
Life can change quickly and drastically, and a change in your circumstances, for better or worse, might mean you are over or underinsured. To avoid paying too much or leaving your dependents short, you should consider reviewing your cover regularly. It’s particularly worthwhile to review your policy when there’s a significant change in your life, such as:
- at the birth of a new child
- when you move house
- if you change jobs or get a promotion
- when your children finish fulltime education or leaving home
- if you separate from a partner or get a divorce.
It’s also worth keeping an eye on inflation and how this might affect your policy. If your final payout is lagging well behind inflation. Make sure it’s worth the same amount as when you bought it or consider extending your cover.
What happens if my insurance provider goes bust?
Taking out a life insurance policy is often a long-term decision. Not only can a lot of things change for you during the lifespan of your policy, but the situation of your provider could change drastically as well. However, if your insurer were to go bust, the Financial Services Compensation Scheme (FSCS) will try and find another insurer to take over your policy or issue a substitute. They also usually ensure that you are covered in the period between insurers. To be eligible for protection through FSCS, you must have insurance from a firm regulated by the Prudential Regulation Authority and the Financial Conduct Authority.
If your broker were to go bust, you will typically only pay a small fee to a new broker to arrange the new policy.
What is child life insurance?
Child life insurance works in the same way as regular life insurance – should your child be diagnosed with a serious illness or condition or worse, your life insurance can pay out a lump sum. It may seem strange to insure your children’s lives, but should the unthinkable happen, a payout can help you financially if you need to give up work to care for your child. While it doesn’t specifically insure medical treatment, you could choose to put the money towards such treatment, if you wanted to. Not many parents decide to take out a standalone policy, but many parents add insurance for their children on to their existing life insurance policies.
What is group life insurance?
Group life insurance is a type of policy taken out by employers for their employees and family. It works very similarly to life insurance but insures the employee rather than the policyholder. The employee’s family receive a payout in the event that they die while working at the company in question.
Can British ex-pats get life insurance?
It used to be standard for British ex-pats only to be able to secure life cover for a maximum of ten years, and they would typically pay for higher premiums than people living in the UK. Ex-pats looking for a longer-term policy would have to reapply after ten years, incurring even higher premiums. However, British ex-pats can now get life cover for mortgages in the UK as well as level life and decreasing life cover for up to 40 years or more. British ex-pats looking for life cover must have at least one of the following:
- a mortgage in the UK
- a potential inheritance tax liability in the UK
- ownership of a business registered and based in the UK
- financially dependent family members who are living in the UK, such as a spouse, partner or children.
Many British ex-pats can also now get access to critical illness cover, either as a standalone policy or as part of life cover. Many UK insurers will not offer a new policy after you’ve become a non-resident, and under many policies, you may invalidate your insurance if you leave the UK within the first two years.
Can you get life insurance without a medical check-up?
Yes. While it varies between providers, most over-50s insurance policies do not require any medical information, history or a check-up. Not all regular life insurance requires a medical exam, but most providers tend to ask for one if you have an underlying condition or pre-existing illness.
What is the difference between key person insurance, group life insurance and life insurance?
All three types of insurance provide a payout in the event of the death of the insured person. However, key person insurance exists explicitly for businesses, when they rely disproportionately on one person, in view of their skills, knowledge or contacts, without which the business would be at risk of financial failure. The beneficiary of key person insurance is therefore the company, and the money goes towards covering the company’s financial losses should a key member of the team no longer be around.
Life insurance exists for the loved ones of the insured person, to ensure they can carry on paying bills and keeping their finances afloat. Finally, group life insurance is taken out by employers, but the money goes to the loved ones of the deceased.