Life insurance is one of those things you’ve likely come across but probably thought you don’t need to worry about. But that may well not be the case. It’s currently estimated that only 35% of people in the UK have life insurance, despite six in ten households saying it would benefit their family.
Life insurance is a way to protect your loved ones from financial burdens when you die. For this reason, it is worth considering whether your family rely on your income. If so, you need life insurance.
In this article, we’ll cover all you need to know about life insurance, from how it works to how to choose and take out a policy. We’ll also run through some frequently asked questions. So, let’s get stuck in!
What is life insurance?
Life insurance is a policy that provides a lump sum payout to the beneficiaries of the contract in the event of the policyholder’s death (or terminal illness diagnosis). It is designed to provide your loved ones with financial support to minimise the impact your death may have on them.
Otherwise known as life assurance or life cover, life insurance will pay out a cash sum, typically used to cover everyday outgoings such as mortgage repayments, childcare costs, and bills. Additionally, there are several types of life insurance policies which can be tailored to your needs — we’ll cover the types of policies and what they cover in the next few sections.
How does life insurance work?
Life insurance works in a similar way to most other insurance policies. You pay a monthly or annual premium to the insurance company; in return, they will provide you with an agreed level of cover. Then, in the event of your death or a diagnosis of a terminal illness, the insurance provider will pay out the agreed lump sum amount to the beneficiaries of the policy — usually close friends, family, or your estate.
Life insurance policies can be taken out in one of two ways. You can take out a single policy to cover yourself or a joint policy to cover you and your partner. With a single policy, the money from the payout will go to your estate. Alternatively, if you take out a joint policy, the money will go to the surviving policyholder — usually a spouse or partner. However, you can also make other arrangements if you’d like the money to go elsewhere — we’ll explain more later in the section “Who receives money from life insurance?”
What are the types of life insurance policies?
There are two main types of life insurance policies:
- Term life insurance policies
- Whole of life insurance policies
Let’s explore them in more detail.
Term life insurance policies
Term life insurance is a type of life insurance in place for a set period, referred to as the ‘term’. A term is typically around 20 or 25 years, but this will depend on the policy. With term life insurance, you’ll make regular payments to the insurance company for the duration of the term. If, during this period, you pass away, the insurance company will provide a payout to the beneficiaries of the policy.
Furthermore, there are three types of term life insurance policies, which are as follows:
- Level: the simplest and most affordable option, level term life insurance still pays a lump sum if you die within the policy term. The level of cover stays the same throughout the term with this type of insurance.
- Decreasing: alternatively, decreasing term life insurance has a decreasing level of cover each year. This type of policy is designed to work alongside repayment mortgages where the remaining debt from the loan decreases over time.
- Increasing: as the name suggests, increasing term life insurance does the opposite and the level of cover increases throughout the policy’s term.
Whole of life insurance policies
Whole of life insurance policies do not have a term and are, therefore, a type of permanent life insurance. Instead, the policy will last your whole life, hence the name. Provided you keep up to date with your premiums, your insurance provider will pay out the agreed lump sum in the event of your death. Depending on your policy and your insurance provider, you may be able to stop making payments when you reach a certain age (this will usually be around 85) while still keeping your policy cover.
It is worth noting that this type of life insurance is more expensive as the payout is guaranteed. But for many, this is worthwhile as it ensures peace of mind that loved ones will receive financial support and be protected if the policyholder passes away.
What does life insurance cover?
Life insurance is designed to help your loved ones financially when you’re no longer around. As we’ve previously mentioned, it helps to cover costs such as mortgage repayments and childcare costs. You may also want to take out a policy to help your family cover additional expenses such as funeral costs or university. However, the exact ins and outs of what your life insurance policy will and won’t cover will depend on the policy you take out.
What types of deaths are covered by life insurance?
Typically, life insurance policies will provide a payout in the event of a death caused by the following:
- Illness that occurred after the policy was taken out
- Natural causes, e.g. old age or heart attack
- Accidents, e.g. car accident or drowning
Many life policies will also cover deaths resulting from suicide, provided they occur outside of the “contestability period” — usually the first two years of the policy. In order for the life insurance claim to be valid in the event of such a death, there must also be no other exclusions in the policy that forbid it.
What won’t life insurance cover?
There are some reasons your life insurance provider won’t pay out in the event of a death. These usually include:
- Death caused by risky activities: some insurers have exclusions in their policies that means you are not covered if you participate in activities or hobbies deemed risky — e.g. bungee jumping or rock climbing. This is not the case for all policies and is, therefore, worth checking with your insurer.
- Lying on the insurance application: your insurer will not payout if you withheld information or lied when filling out your life insurance policy details. For example, if you omitted details about your medical history. Furthermore, lying on an insurance policy application is fraud and, therefore, invalidates your policy.
- Expired life insurance policies: if your policy expires and you do not renew it before you pass away, your beneficiaries will not receive a life insurance payout from your insurer.
- Criminal activity: insurers will not pay out if you die while committing a criminal offence — e.g. if you die in a car crash while under the influence of drugs or alcohol.
While there are several reasons why an insurer may reject a life insurance claim, the reality is that most claims are successful. According to the Association of British Insurers, 98% of individual and group claims were paid in 2021. The main reason why the remaining claims were rejected was “non-disclosure”. This is where a policyholder withholds information from the insurance company. For this reason, it is crucial that you make sure you fill out the insurance application as honestly and accurately as possible.
Who receives money from life insurance?
Generally, you can decide who gets the payout from your life insurance policy after you pass away. But, you will need to ensure that the right arrangements have been made prior to this.
If you have a single life insurance policy, the money from it will be paid into your estate. If you want this to then go to a specific person or people, you can do one of the following:
- Name the beneficiary or beneficiaries in your will
- Set up the payout to be put into a Trust and name the beneficiary or beneficiaries
If you have a joint life insurance policy, the lump sum will usually be paid to the surviving policyholder unless alternative arrangements have been made. For example, you can name beneficiaries in your will. Or, if you and your partner separate, you may also be able to convert your joint policy into two single policies — if this is the case, speak to your insurance provider to check.
Finally, when it comes to sorting your will or Trust, it is best to speak to a legal and finance expert. They will be able to advise you properly, so your wishes are clearly stated.
Do you need life insurance?
Whether you need life insurance will really depend on your circumstances. If you have people who rely on you financially, such as a partner and children, life insurance is a way to help ensure they are protected when you are no longer around to support them. A life insurance payout can be used to cover costs such as mortgage repayments, funeral expenses, and childcare costs. For this reason, a life insurance policy is suitable if any of the following apply:
- You have a partner who relies on your income
- You have dependents such as young children
- You have a mortgage for a property that your family lives in
On the other hand, you may not need a life insurance policy if:
- You are single
- Your partner has a sufficient enough salary for them (and your children) to live off
- You are on a low income and qualify for State benefits
One final thing to note is that if your family are on means-tested benefits, a life insurance payout may affect the benefits they are eligible for. Before you take out a policy, check to see what impact it could have on your dependents.
How much does life insurance cost?
The cost of a life insurance policy will depend on the type of policy you choose — with whole of life insurance being the most expensive — and the following factors:
- Age: typically, the older you are when the policy is taken out, the more expensive the insurance premium. The reason is that the older you are, the more likely you are to develop a medical condition that affects life expectancy.
- Lifestyle: your insurance premium is likely to be higher if you lead an unhealthy lifestyle (such as having bad eating habits and not exercising), as it can reduce your life expectancy.
- Health: you may have a higher premium if you have serious pre-existing medical conditions.
- Family medical history: your insurance premium may also be impacted by your family medical history. For example, if there is a history of heart conditions in your family, this may increase the cost of your insurance policy.
- Occupation: insurance premiums can be increased if you have a job deemed higher risk. For example, someone working in a factory may pay more than an individual who works in an office.
- Smoker status: smokers will typically pay more for life insurance than non-smokers as they are at higher risk of health issues.
- Length of cover: longer-term insurance policies tend to be more expensive than short-term policies.
- Amount of cover: when taking out a life insurance policy, you decide the level of cover. With this in mind, the higher the level of cover you opt for, the higher you can expect your insurance premium to be.
As we’ve mentioned previously, it is crucial that you are honest when filling out your application for a life insurance policy. Failure to do can not only invalidate a claim made in the future but is also fraud.
How do you get life insurance?
You can buy life insurance from a few different places, including:
- Some big retailers, such as supermarkets
- Insurance brokers — some specialise in life insurance
- Credit card providers
- Financial advisers
- Online comparison sites
- Mortgage providers — many will also offer life insurance when you take out a mortgage, but this can often be a more expensive option than going elsewhere.
When it comes to deciding on the specifics of the policy, here are the steps to take:
- Determine how much cover you need. Before you get stuck into the small print of a policy, decide what you need your life insurance policy to cover in the event of your death. By this, we mean things like mortgage repayments or university fees for your child. Once you have established this, you can look at quotes for policies that will cover all the things you need them to.
- Prepare your life insurance application. The next step is to prepare to fill in your application. To do this, you’ll need to gather your personal information, such as your lifestyle habits and personal details. You’ll also need your and your family’s medical histories with as much detail as possible to provide to your potential insurance company.
- Compare quotes and insurance providers. Before you sign up for a life insurance policy, compare quotes from multiple providers to get the best value and cover for your money. Also, check the fine print to ensure that there are no exclusions that may mean a claim is rejected in the future.
Once you have completed these steps, you can decide which policy is right for you and sign onto one.
Do you get all the money from life insurance?
When the life insurance policyholder dies, the lump sum will be paid to the beneficiaries of the will or Trust — provided the claim is accepted by the insurer. The amount that is paid will be the pre-agreed amount stated in the insurance policy.
Do you get your money back at the end of term life insurance?
No, there is also no cash value in a life insurance policy which means you won’t get your money back when it ends. When the term ends, you will stop making payments, and the cover will end.
How long do you pay life insurance?
Typically, term life insurance policies last 20 to 25 years, although you may decide on a longer or shorter policy. Regardless, you’ll make regular payments for the duration of the policy. Some policies do also allow you to stop making payments when you reach a certain age (often around the age of 85) whilst also keeping your cover.
What is over 50s life insurance?
Over 50s life insurance is a specialist life insurance policy for those usually between the ages of 50 to 85. Additionally, this type of policy is a whole of life insurance policy, so it will last for the rest of your life.
Life insurance is a specialist policy that provides a lump sum payout in the event of your death. They are designed to provide financial support and security for loved ones when you are no longer around. This allows them to cover costs such as mortgage repayments or funeral costs, relieving the financial burden that your passing may have on them.
For this reason, it is recommended that you take out life insurance if you have a partner or dependents (such as young children) who rely on your income. There are several different types of policies which can be tailored to your needs and the level of cover you require.