What is life insurance?

Life insurance pays out either a lump sum or regular payments on your death, giving your dependants financial support after you’ve gone.

The amount of money paid out depends on the level of cover you buy.

You decide how it’s paid out and whether it will cover specific payments – such as mortgage or rent – or if it’s to leave your family with an inheritance.

There are two main types:

These run for a fixed period of time, known as the ‘term’ of your policy, such as five, ten or 25 years. They only pay out if you die during the policy.

There are three kinds of term life policies.

1. Level – pays as a lump sum if you die within the agreed term. The level of cover stays the same throughout. This is the most simple and affordable option.
2. Decreasing – the level of cover reduces each year. It’s designed to be used with repayment mortgages, where the outstanding loan decreases over time.
3. Increasing – the level of cover rises over the term of the policy, to keep up with inflation.

These pay out no matter when you die, as long as you keep up with your premium payments.

They’re often used to help towards a funeral or for Inheritance Tax planning.

However, they’re typically more expensive than shorter-term policies. There’s also a possibility that if you live longer than you expected, you could end up paying more in than you’ll get out.

You can choose a joint policy or a single one.

If you take out joint life insurance, the money will go to the surviving policyholder – such as your spouse. This is unless you made alternative arrangements.

If you take out single life insurance, the money goes into your estate. So you need to decide who it goes to when you die.

A joint life policy is usually more affordable than two separate single policies. However, joint life cover only pays out on the first death. Whereas buying two single policies would make sure there’s a pay out on each death.

Life insurance pays out when you die – not when you lose an income due to illness or disability.

It’s suitable for you if you have:

• dependants, such as school-age children
• a partner who relies on your income, or
• a family living in a house with a mortgage that you pay – a life insurance policy can provide for them if you die.

You might also want a policy that covers your funeral expenses.

You don’t need it if:

• you’re single
• your partner earns enough for your family to live on
• you’re on a low income and could qualify for State benefits.

Check if you already have it through your work. Employee packages often include ‘death in service benefits’ that will provide an amount of cover that’s linked to your salary.

Depending on how much it’s worth, you might not need an extra life insurance policy. But remember that if you stop working for that employer, you’ll no longer be covered under their policy.

You might also need to think about whether receiving a payout will affect any means-tested benefits your dependants might otherwise qualify for.

The cost varies, depending on a number of factors. But life insurance is generally considered to be good value.

A policy giving your loved ones a decent amount of financial protection can cost from just a few pence a day.

Your monthly payments will depend on things such as:

• your age
• your health
• your lifestyle
• whether you smoke
• your family medical history
• the length of the policy
• your occupation – a high-risk job might push your premiums up.

The price is also affected by the level of cover you buy. The amount of cover you need will depend on:

• any debts
• mortgage/rent
• number of dependents
• take-home pay or income from other sources.

Premiums can vary, so it’s worth shopping around and comparing different quotes.

You can get life insurance quotes from:

• banks
• specialist brokers – see our guide on When to use an insurance broker
• comparison sites – see our guide on How to buy insurance through comparison sites
• direct from insurers – not all sell through comparison sites
• credit card companies
• independent financial advisers – see our guide on Choosing an adviser
• retailers, including major supermarkets
• mortgage providers – most offer life insurance automatically when you take out a mortgage, but you might be able to find a better deal elsewhere.
  

Most claims are successful, but it’s important to give your insurer all the information they ask for. When you make a claim, they will check your medical history. If you didn’t answer truthfully or accurately in your application, or didn’t disclose something, they might not pay out.

Make sure you know exactly what is and isn’t covered. Be aware that definitions and exclusions (what isn’t covered) can vary between different insurers. If you see something you don’t understand, ask the insurance provider, or your insurance broker or financial adviser.

Don’t forget to sign the ‘nominated beneficiaries’ form your provider gives you. This is so they pay the benefits to the person, or people, you chose to get this money if you die.  

If you don’t name a beneficiary then the insurer pays the proceeds into your estate. This could then take a long time to get to the person you want to receive the money, and could mean it is subject to inheritance tax.

You have 30 days from buying the policy to change your mind and get a full refund.

If you’re young and/or healthy, it might be worth seeing if you can a better deal elsewhere.

But as you get older or develop medical problems, you might find it’s cheaper to stick with a policy you bought when you were younger.

If you decide to switch, make sure you don’t cancel your existing policy until the replacement policy is fully set up and you have made the first monthly payment.

When you’ve cancelled a policy, you can’t change your mind.

With some insurance policies, you can ask for extra features to be included. For example, if you pay a bit extra to add a ‘waiver of premium’ to your policy – your premiums will be paid automatically if you can no longer work due to accident or illness.

This is to protect against your policy being cancelled if you miss a monthly payment.

You can ask your insurer to cancel your policy at any time, but there are a few things to be aware of: 

• replacement cover might be more expensive as prices generally increase with your age

• if you have pre-existing medical conditions, they might not be covered by a new policy 

• you won’t be able to reinstate the policy once it’s cancelled.  

There are usually no cancellation fees, so you’ll just stop paying for it – you won’t receive a refund of any premiums you’ve already paid.