Life insurance

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What is life insurance?

Life insurance can help your loved ones deal with the financial impact of your death.

It could pay out a cash sum if you pass away during the length of the policy.

Terminal illness is included with all term life policies as standard. If you add critical illness cover and are diagnosed with one of the listed critical illnesses during your policy term, you'll be covered for that too. Please note, critical illness cover comes at an additional cost.

Little girl celebrating her birthday is picked up by her dad

How does life insurance work?

Life insurance usually works like this:

  1. You choose the type of policy you want, how long it lasts and the payout amount
  2. You pay the regular premiums to keep the policy active
  3. If you die within the policy term, your beneficiaries must file a claim to receive the payout
  4. If the claim is successful, your loved ones will receive the payment and the policy will end

The amount paid out can change over time. If you take out a level term or life assurance policy, the payout is fixed. With a decreasing term policy, the payout decreases over the term of your cover.

Read more on our guide to how life insurance works.

Do I need life insurance?

Life insurance isn’t a legal requirement, but it could give your dependents financial stability when you die.

You may want to consider life insurance if:

  • You have dependants or a partner who relies on your income.
  • You have a mortgage, credit card, loan or other debt.
  • You might want to cover funeral expenses, to ease the cost for your family.

What does life insurance cover?

You need to understand what your life insurance covers to give you the peace of mind that your family will have the financial support they need.

Cover varies from one policy to another, but there are some things that are always covered or excluded: 

What's usually covered? What's not usually covered?
Most common causes of death Pre-agreed conditions
Terminal illness Drug and alcohol abuse
Self-harm within 12-months of policy start date
Dangerous activities
Critical illness or injury
Disabilities or chronic illnesses
Undisclosed health issues

What are the typical life insurance exclusions?

If you die because of the following, you typically won’t be covered:

  • Suicide or self-harm within a specified time of the policy start date (typically 12 months, but check your policy documents)
  • Pre-existing medical conditions (if you hadn’t declared them)
  • Dangerous activities
  • Drug or alcohol abuse

If you or someone you know is contemplating suicide, get help now. You can call the Samaritans at any time for free on 116 123, or text SHOUT to 85258 to speak to a trained Shout Volunteer. For non-urgent mental health help you can email the Samaritans and they’ll reply within 24 hours.

Are you eligible for life insurance?

If you’re a UK resident, aged between 18 and 85 then you’re off to a good start. You’ll also need to honestly answer a few questions.

If you’re looking for a joint policy, you’ll need the below details for both policyholders.

  1. Health

    Things like any pre-existing medical conditions you might have, and your weight and height

  2. Age and occupation

    Generally, the younger you are the cheaper the policy will be. How risky your job is also plays a part

  3. Lifestyle

    Whether you smoke, drink or exercise

Types of life insurance

There are two main types of life insurance - choose the one that meets the needs of you and your dependants.

Level term life insurance

Level term life insurance is the simplest type of life insurance. You decide the payout value and duration of the policy.

If you die within the term of the policy, your dependants will receive the payout as a fixed sum. The amount paid out stays the same regardless of when a claim is made.

Level term life insurance can be the more expensive option because the amount paid out doesn't change. Make sure to review your policy often to check the payout amount is still right for your dependents.

Advantages

  • You’ll know how much the payout will be – it doesn’t decrease over time
  • Premiums stay the same throughout the term of your policy – they won’t be reviewed and increased

Disadvantages

  • Usually more expensive than decreasing term
  • Inflation could mean your policy’s worth less than you intended in real terms when you die
  • No payout if you die outside of the policy term

Decreasing life insurance

Also known as mortgage life insurance, it’s designed to cover debts that decrease over time - like your mortgage.

So, the amount paid out by the policy reduces with time. If you were to die near the start of the policy term, your dependents would receive more than near the end, when there’s less mortgage to pay off.

This can be a cheaper life insurance option than level term. But if your circumstances change, and you increase your borrowing, you might find the amount isn’t enough.

Advantages

  • Usually cheaper than level-term cover
  • Can cover your mortgage so your partner or loved ones won’t be faced with losing their home if you die

Disadvantages

  • Payout value decreases over time
  • It might only cover your mortgage and not extend to other bills and expenses for your family

Other types of cover

There are a number of different types of life insurance available, but they all pay out either as level term or decreasing policies.

What’s different about these types is they’re mainly based on your personal circumstances. So, the cover changes slightly.

Joint life insurance

If you’re in a relationship, you could take out a decreasing term policy that pays out in the event of either of you dying. It can be a cheaper option than holding two policies. But it will only pay out on the first death, after which the cover will end.

Life insurance for new parents

When you’ve got a little one on the way, thinking about the future is inevitable.

If you were to pass away, life insurance could cover childcare costs as well as the mortgage, so your partner won’t have to worry about paying out large sums of money.

Life insurance with pre-existing medical conditions

A pre-existing medical condition can mean fewer life insurance providers to choose from. You might also have to pay a higher premium to have your condition included on your policy.

Alternatively, you can choose to exclude your existing illness from your cover altogether. But the policy won’t pay out if you die as a result of the excluded condition.

Income protection insurance

Income protection insurance pays out a monthly sum if you can’t work due to illness, injury or being made redundant – it basically replaces your normal wage, but only up to a certain amount.

When you take out a policy, you specify what percentage of your wage you want it to cover, and whether you want it for a short term (usually around 12 months or so) or long term (typically ends when you go back to work, retire or die).

Does life insurance pay out?

98% of protection insurance claims were paid out in 2022 - totalling a record £6.85 billion

According to the ABI, May 2023

Life insurance and critical illness cover

Critical illness cover is a separate policy that can be taken out alongside life insurance, or on its own (it won’t affect your life insurance if you buy them separately).

It can help you financially if you’re diagnosed with a serious illness during the term of your policy, like if you’re unable to work, for example.

You’ll be insured for a fixed amount, which is paid either monthly or all in one go.

Senior gentleman looking after his grandkids and curly haired dog

How much life insurance do I need and for how long?

Deciding how much life insurance you need and how long to make the policy last for can be a difficult decision.

Generally, the advice is to take a policy worth 10 times the highest earner’s annual salary. But the higher the amount you’re insured for, the higher your premiums.

What do you need cover for?

Working out the purpose of the insurance will help work out how long you need the cover for. If it’s for your mortgage, take out life insurance to cover your remaining mortgage term. If it’s to see your children through their education, make sure it covers you until your youngest finishes their education.

What type of cover do you want?

You’ll have to decide whether to take out level or decreasing term cover and whether you want critical illness included or not. The more extensive your cover, the more it'll cost.

Make sure you’ve covered everything you need to

It doesn’t just have to be about your mortgage. You can factor in other debts and monthly outgoings too, such as personal loans and credit cards. Consider future costs too. If you have children, would they need help through university? And funeral costs can be a big expense at a difficult time.

Consider Inflation

The amount you choose might be worth less in real terms in a few decades’ time because of inflation.

Frequently asked questions

If you’re aged between 50 and 79, a whole of life policy is an option. It doesn’t require a medical assessment to qualify and you stop paying premiums when you reach a certain age (usually 85 or 90). There’s usually a short qualifying period at the start of the policy.

Find out more about over 50s life cover in our guide.

As soon as you have people who rely on your income, like a partner or children, things change. Ask yourself if they could cover the cost of the mortgage, any other debts, or everyday living without your income. If the answer is no, think about getting life insurance.

You don’t have to have a partner or children for life insurance to be relevant. It can be an important part of estate planning. Mortgage cover could be helpful if you have a family member you plan to leave your estate to, for example.

Consider how long your dependants will need support – for example, would you want to help with the costs of your children’s university education, or leave your partner some extra money for retirement?

To get the most out of your life insurance cover, you could:

  • Take out cover early – taking out a life insurance policy when you’re younger means your premiums won’t be as high as if you were older because you’re less of a risk
  • Place the policy in trust – this gives you greater control over who benefits from and looks after the policy, as well as reducing inheritance tax
  • Consider what add-ons you need – combining critical illness cover with life insurance could work out cheaper than buying them separately
  • Compare policies – check what’s being offered and what’s excluded from the cover, instead of just the price
  • Reassess your cover – make sure your life insurance still meets your needs and tell your insurer about any lifestyle changes
  • Be honest – not being truthful about your health could mean you risk losing any payout due. If you’re not sure how to answer a question, ask the insurer

It’s a good idea to review your life insurance yearly. Your circumstances could’ve changed, and your life insurance might not meet your needs anymore. 

It’s rarely a good idea to cancel an existing life insurance policy. But you should consider amending your policy or taking out a second policy if your circumstances have changed.

Times when you might need to amend or take out more cover include: 

  • Changes to health or lifestyle
  • Divorce or separation
  • New job or redundancy
  • More debt, or an increased mortgage
  • Changes to beneficiaries

Many employers offer a form of life insurance – ‘death in service’ cover - which usually offers a pay out of three or four times your annual salary (whether your death is as a result of your employment or not). If you have it, and feel it’s sufficient to provide for your family, then you might feel like you don’t need life insurance as well.

Bear in mind, when you leave your employment, this cover ceases - and there’s no guarantee your future employers will offer it as part of your package.

It’s possible to hold multiple life insurance policies and in some cases this might be worth considering. If, for example, you have an existing policy but need more cover, the most cost-effective way might be taking out an additional policy.

You can get life insurance with pre-existing medical conditions. But expect to pay more and have less insurers to choose from.

You need to tell insurers about any pre-existing conditions you have. If you don’t, you won’t be covered for them.

When you take out cover, you’ll be asked questions about your medical history.

You could choose to exclude the condition from your cover, which might lower your premiums. But it does mean if you die as a result of that condition, there’ll be no payout.

Some providers will give you time to make up missed payments without your policy being affected. But this will be on a case by case basis.

If you miss payments, and don’t get in touch with your insurer, your policy will be cancelled. You won’t get any of the money you’ve paid back. If you’re worried you can’t keep up with payments, contact your insurer. 

If you smoke, or use nicotine products like vapes, your life insurance will cost more. Most insurers will still risk rate you as a smoker if you’ve quit within the last 12 months.

If you’ve already got life insurance and you quit smoking more than 12 months ago, tell your insurer, as they might lower your premiums.

Technically no, but the two terms are often used to mean the same thing. Strictly speaking, life insurance pays out if something happens to you, whereas life assurance pays out when it does. So level term cover is life insurance, whereas a whole-of-life-policy is life assurance.

This is dependent on your circumstances, but the right income protection (IP) policy can be valuable as a stand-alone product or as an addition to life insurance/critical illness cover. Life insurance won’t cover you if you cannot work due to illness or disability. Some IP policies include an element of death cover.

It’s simply a way of insuring your monthly payments so they’ll still be paid if you’re unable to work due to ill health. Payments are made either until the end of the policy term, until you’ve reached a specific age, or until you’re able to return to work.

Some policies include cover for terminal illness. They’ll pay out while you’re still alive if you receive a terminal diagnosis and are expected to die within 12 months.

Life insurance payouts aren’t usually liable to income tax or capital gains tax. But your estate could have to pay inheritance tax (IHT) on a payout from your policy. Writing your life insurance policy in trust should mean your estate doesn’t have to pay IHT. Plus, by writing your policy in trust your beneficiaries could get the payout quicker. Tax rules can change though, and they depend on your personal circumstances. It might be worth getting financial advice, to help you plan better for your requirements.

If a policyholder cancels within a certain period of time then the adviser or broker who sold the policy would have to repay a proportion of their commission back to the provider.

It can help protect you from being mis-sold a policy by a broker. The broker will want you to have an appropriate policy that you’re happy with so you’re less likely to cancel it.

You may be eligible to claim bereavement support payment to care for you and your children if your partner or spouse dies. It's a good idea to check what bereavement benefits you’re entitled to.

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Buying a house or starting a family? If your circumstances change, you might want to consider getting life insurance

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Page last reviewed: 10 August 2023

Page reviewed by Holly Thomas


[1]For comparing quotes online, Go.Compare introduces customers to Reassured which is a trading name of Reassured Ltd who are authorised and regulated by the Financial Conduct Authority no. 616144. Go.Compare's relationship with Reassured Ltd is limited to that of a business partnership, no common ownership or control exist between us.