Life insurance ranks among those topics most people know they should understand but somehow never get around to researching properly.
Most of us put off learning about life insurance because it feels complicated and, frankly, a bit morbid.
We tell ourselves we’ll sort it out later, when we have more time or when our circumstances change. Meanwhile, confusion grows around what it actually does, how much it costs, and whether we even need it.
But keep reading, by the end of this guide, you’ll know whether life insurance makes sense for your situation and feel confident about taking the next step, whatever that might be.
What is Life Insurance?
Think of life insurance as a safety net for the people who depend on you financially.
You pay a monthly premium to an insurance company, and in return, they promise to pay a lump sum to whoever you choose when you die.
That’s it.
The amount they pay out is called the ‘sum assured‘ or ‘death benefit’, and you decide how much this should be when you take out the policy.
You also choose who receives this money – these people are called your ‘beneficiaries’. They could be your spouse, children, parents, siblings, or even a charity close to your heart.
Unlike investments where returns fluctuate with market conditions, life insurance provides a guaranteed payout amount. Your beneficiaries know exactly what they’ll receive, assuming you keep paying the premiums.
The money your beneficiaries receive is tax-free in the UK. This means they get the full amount without deductions.
The most popular policies are called term assurance/term insurance.
You set the plan up for a fixed number of years. If you die before it ends then it pays out. If you don’t then the policy just stops.
Which Type of Life Insurance Suits You?
There are several types of life insurance to suit different needs and budgets.
Term Life Insurance
Term insurance covers you for a specific period, such as 10, 20, or 30 years.
If you die during this term, your beneficiaries receive the payout. If you outlive the term, the policy ends and you receive nothing back.
This might sound harsh, but it’s exactly how your car insurance works – you pay for protection, and if nothing happens, that’s actually a good outcome!
Level Term Insurance
Level Term Insurance maintains the same payout amount throughout the policy term, this called level cover.
If you take out £500,000 of cover, your beneficiaries receive £500,000 whether you die in year one or year twenty. This type suits people who want to ensure their family can maintain their lifestyle or pay off debts that won’t decrease over time.
Decreasing Term Insurance
Decreasing Term Insurance reduces the sum assured amount each year, usually in line with a declining mortgage balance.
It costs a bit less than level term because the insurer’s risk decreases over time. Many people choose this when their main concern is ensuring the mortgage gets paid off if something happens to them.
It’s the most popular choice for protecting a repayment mortgage but you can choose to have decreasing cover by itself.
Family Income Benefit
Family Income Benefit pays out a regular income rather than a lump sum, which can help families budget during difficult times.
For example, instead of receiving £300,000 immediately, beneficiaries might receive £2,000 monthly for twelve and a half years.
This approach can feel more manageable for families who worry about handling large sums of money during grief.
The monthly payments are guaranteed and continue regardless of how the family spends them.
Your beneficiaries receive a fixed monthly payment, so they know exactly what’s coming in each month, making it easier to budget for mortgage payments, school fees, or daily living costs.
The payments stop at the predetermined end date regardless of when you die during the policy term. This makes it particularly suitable for parents who want to ensure income continues until their youngest child reaches 18 or finishes university.
You can structure the policy so payments end when you expect your family to be financially independent.
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Whole Life Cover
Whole of life insurance continues until you die, whenever that happens, as long as you keep paying premiums.
Because the insurer knows they’ll definitely pay out eventually, premiums are higher than term insurance.
However, many whole of life policies include an investment element where part of your premium is invested to potentially grow in value. These policies can become quite complex, with options to withdraw money during your lifetime or adjust premium payments based on investment performance.
The investment element means returns aren’t guaranteed, and charges can significantly impact growth. Universal life policies offer more flexibility in premium payments and death benefits but require more active management.
If you need an open-ended form of life insurance then this is one to consider.
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Joint Life Policies: One Policy, Two People
Joint life policies cover two people, usually spouses or civil partners, under a single policy.
They pay out when the first person dies, then the policy ends.
This means you get one payout for two lives covered, which explains why they cost less than buying two separate policies.
These policies work well for couples whose main concern is ensuring the surviving partner can manage financially after losing the primary breadwinner’s income.
However, the limitation is obvious: after the first death and payout, the surviving partner has no life insurance.
To improve this situation you could have a policy each. They can even have different levels of cover.
Then, should one partner die, the surviving partner can continue with their own cover in place.
Can You Have More Than One Life Policy?
You need to get some more life insurance but can you actually have more than one policy? Good news, having multiple life insurance policies is completely fine and for many people makes perfect financial sense.
How Does Life Insurance Work?
Life insurance is actually quite straightforward once you strip away the jargon.
You pay a monthly amount to an insurance company, and if something happens to you, they give your family a lump sum of money.
It’s really that simple.
You’ll pay a set amount each month, usually by direct debit so you don’t have to think about it. Your monthly payment depends on things like your age and health when you apply.
If you die while the policy’s running, your family contacts the insurance company with your death certificate. The insurer checks everything’s in order, then sends the money directly to whoever you’ve chosen to receive it, the plan then stops.
The amount paid out is tax-free.
Do You Need Life Insurance?
The honest answer is that not everyone needs life cover, and that’s perfectly fine.
The question isn’t whether life insurance is good or bad – it’s whether it makes sense for your specific situation right now.
When Life Insurance Makes Sense
Life insurance becomes relevant when other people depend on your income or when your death would create financial hardship for those you care about.
Young single people with no dependents might reasonably decide they don’t need cover yet, though getting quotes while young and healthy can reveal surprisingly affordable premiums.
Parents face the clearest need for life insurance.
If you’re the main earner and something happened to you, could your family manage the mortgage, childcare costs, and daily expenses on the remaining income?
Many couples assume the surviving partner could simply return to work, but childcare costs and emotional impact can make this harder than expected.
Single parents carry even more financial responsibility. Without life insurance, children might need to move in with relatives, change schools, or face financial uncertainty during an already traumatic time.
Business Owners
Business owners should consider what would happen if one of the directors or shareholders died. Life insurance can be used to step in and solve this financial problem.
Working Out How Much Cover You Need
The amount of cover you need depends on your family’s expenses, outstanding debts, and how long you want the money to last.
A rough starting point is normally eight to ten times your annual income, but this varies enormously based on your circumstances.
Someone with a large mortgage and young children might need more, while someone with substantial savings and older children could need less.
Start by covering all of the debts and financial liabilities.
This could include:
- mortgage/s
- loans
- credit cards
- car finance
- secured loans
Then consider future costs like monthly household bills, school fees, university fees or care for elderly relatives.
The most accurate way to work out how much cover you need is to ask a financial adviser. They will be able to look at your situation and then suggest the best type and amount of cover.
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What Affects Your Premiums
One of the biggest misconceptions about life insurance is that it’s prohibitively expensive.
Many people imagine premiums that would strain their budget, when the reality is often much more manageable than expected.
Your age when you apply has the biggest impact on cost, as premiums are lowest for younger ages.
Health and weight plays a significant role, but even people with medical conditions often qualify for cover. If you smoke then your premiums will be much higher than a non-smoker.
How Expert Advice Can Transform Your Experience
Independent insurance advisers provide access to products from across the market rather than just one company’s offerings.
Brokers understand which insurers are most competitive for different ages, health conditions, and coverage amounts. They can often secure better terms than you’d find by approaching insurers directly, particularly if you have any health conditions or work in a specialised occupation.
But perhaps most importantly, an adviser can help you to set up your life cover in the best possible way, for you and your family.
Your Next Steps
If life insurance makes sense for your situation, the smartest move is speaking with an independent adviser who can access the whole market and find the best deal for your circumstances.
Independent advisers have access to insurers you can’t approach directly and understand which companies offer the best terms for different situations.
Getting quotes and advice doesn’t commit you to buying anything. Take time to understand your options, but don’t let endless research delay action if your family would benefit from protection.
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Find a life insurance brokerFrequently Asked Questions
No, with term life insurance you don’t get money back if you outlive the policy. This works like car insurance – you pay for protection, and if nothing happens, that’s actually a good outcome. The premiums paid have provided peace of mind and protection during the coverage period.
If you stop paying premiums, your policy will lapse (stop) and you’ll lose cover. Most insurers provide a grace period of 30 days after a missed payment. Some whole life policies might have a small cash value you can access, but term policies have no surrender value.
Simple applications can be approved within days, while more complex cases requiring medical exams might take 4-6 weeks. The timeline depends on the coverage amount, your age, health, and whether additional medical information is needed.
Practically speaking, there’s no difference in the UK market – the terms are used interchangeably. Technically, life assurance covers events that will definitely happen (death), while insurance covers events that might happen.
Term insurance covers you for a specific period and costs less but has no cash value. Whole life insurance continues until death and often includes investment elements but costs significantly more. Most people choose term insurance for affordability.
Yes, you can have multiple policies from different insurers, and they’ll all pay out if you die. However, insurers consider your total cover when underwriting new policies to ensure it’s reasonable compared to your income and circumstances.
Decreasing term insurance reduces the payout amount each year, usually matching a declining mortgage balance. It’s cheaper than level term and works well when your main concern is paying off debts that decrease over time.
