Published by Joe Davine on
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What do I need to know about life insurance?

Taking out a life insurance policy can seem complicated, but don’t worry: it’s easy to find affordable coverage no matter what your situation.

Let’s clear up a few basics first:

  • Life insurance policies provide a cash lump sum payout in the event of your death, in exchange for monthly premium payments.
  • You cannot cash out a life insurance policy and get back a percentage of the premiums you have paid in; they have no cash value unless you make a successful claim.
  • There are numerous different types of life insurance policies you can take out, including a variety of term options, critical illness covers, and life assurance policies.

Keep reading and we’ll take you through everything you need to know about life insurance.

Why take out life insurance policy?

With so many different types of insurance around, life insurance can often be pushed to the back of the queue. Things like home insurance and car insurance protect you now, whereas life insurance seems more distant and abstract. However, life cover is something you should seriously consider, especially if you have a partner, children, or other dependents.

Taking out a life cover policy can help to make sure any people who rely on you are financially secure if the worst were to happen. Life insurance is commonly used to offset the cost of a mortgage, help cover funeral costs, or replace your income in the case of redundancy or critical illness.

Whether life cover is right for you will always depend on your personal situation, but given the many different varieties of life insurance policies available, there are a lot of cases in which you could benefit from a policy.

What are the different types of life insurance?

Life insurance is not a one-size-fits-all type of insurance. Several different varieties are available, so before taking out a policy, it’s important to know which style of life insurance fits your needs. Here are the options you’ll want to consider.

Term life insurance

The most common type of life policy, term life insurance is designed to cover you for a set period of time (known as the ‘term’). If you die or become terminally ill during the agreed term, your policy will pay out a cash lump sum. The size of this will depend on a variety of factors such as your age and health, along with the amount you pay in monthly premium payments. If you don’t die during the term of the policy, then it will expire and not payout will be made.

There are three different types of term insurance, which have different rules regarding how your premiums and cash benefit amount are calculated:

Fixed term life insurance

Fixed term policies, also known as ‘level term life insurance’, are the most straightforward of the term insurance options. You agree a set time period that the policy will cover you for (usually between 5 and 50 years), and a fixed premium rate and cash benefit amount. These stay the same for the entire duration of your policy; if you’re paying £15 a month for £100,000 of cover in the first year, you’ll still be paying the same for the same coverage in the final year of the policy.

Decreasing term life insurance

Decreasing term insurance policies are most commonly taken out to cover mortgages, or other debts that decrease over time. For this reason they are also sometimes referred to as ‘mortgage life insurance’ policies. Just like with a level term policy, you agree a set time period and fixed monthly premiums, but with the difference that the size of your cash benefit falls over time.

This generally means your premiums are lower than with fixed term policies, and that the amount your policy pays out will decrease in line with your mortgage. Decreasing term policies are often taken out as part of buying a house, as they ensure that if you were to die unexpectedly, your loved ones wouldn’t have to worry about the mortgage payments as the policy would pay off the whole debt at once.

Increasing term life insurance

With an increasing term policy, you also take out cover for a set period of time, but both your premium and cash benefit amounts rise over time. Increasing term life insurance is designed to offset the effects of inflation. If you were to take out a fixed policy with £50,000 worth of cover but a claim wasn’t made until 30 years later, that £50,000 payout would be worth less than it was today. An increasing term payout would increase each year so your payout retains the same value.

Always read the fine print on an increasing term policy, as your premiums will usually rise at a rate faster than your cash benefit, making this type of policy more expensive than other options.

Life assurance

Life assurance policies are also known as ‘whole of life policies’. As the name implies, these are policies that have no set term limit; they last the rest of your life so long as you keep paying the monthly premiums. Life assurance is typically more expensive than the different term cover policies because it is guaranteed to pay out regardless of when you pass away.

Over 50s life cover

Over 50s insurance policies are a form of life assurance designed specifically for people over 50. Policies for over 50s tend to have lower payouts than other forms of life protection, and are best suited for helping to cover the cost of a funeral or leave a little bit extra behind for the next generation. Typically you’ll pay monthly premiums for an over 50s policy until your 90th birthday, but the policy will pay out regardless of if you live beyond this point.

Critical illness cover

Many life insurers allow you to add critical illness cover as an optional extra. This type of cover is designed to pay out if you develop a critical illness that prevents you from working. Exactly which conditions you are covered for will depend on the policy you take out, and adding critical illness cover to your insurance will lead to an increase in your monthly payments. You can’t usually take out critical illness insurance as a stand-alone policy, but adding this type of cover to your life insurance will give you the most comprehensive policy.

Other life insurance policies

The policies explained above are by far the most common forms of life insurance taken out in the UK, but there are other options you can look into if you’re looking to insure yourself for something specific. Other life insurance policies include:

  • Redundancy insurance. A form of income protection insurance, redundancy insurance will cover you for loss of income in case you were to lose your job.
  • Short term insurance. If you want a life insurance policy that expires quickly, short term policies are a form of term life insurance with very short terms. Policies like this are often used to cover people when they are moving jobs.
  • Endowment insurance. Unlike other life protection policies that pay out upon death, endowment insurance is more like a savings plan which pays out a lump sum after a set term.

How much does life insurance cost?

When you take out a life cover policy, you will be paying monthly premiums. These range in cost depending on a number of factors, such as how much you want to be covered for and how long you want the policy to last. Your health and age are also taken into account, and some life insurers might want you to have a medical checkup.

Costs can start as low as £5 a month or even less, although many people will end up paying somewhere between £10 and £20 a month, and usually over £25 a month if critical illness cover is added to the policy. The precise cost will depend on the type of life cover you choose. A decreasing term policy will generally be cheaper because your cover decreases over time, but this is not always the case.

How much cover do I need?

The answer to this question will depend on your personal financial situation and what you want to be covered for. If you want to cover a specific debt, such as a mortgage, then you’ll want to look for policies that cover the size of the debt. If you want to protect your family after your death, then it’s best to consider the expenses they might need to cover, and what your income currently is in order to decide what size of payout you should look for. These expenses might include things such as education costs, childcare, and ongoing bills.

When deciding how much cover to take out, consider factors such as:

  • How much you currently earn
  • Any long-term debts, such as your mortgage or other loans
  • The people who are dependent on you, be it your spouse, children, or elderly parents
  • Life insurance benefits you might need, such as critical illness cover

Will this policy always pay out?

It's important to remember that life policies aren't 100% guaranteed to pay out, however it is not common for claims to be rejected. There are common exemptions such as suicide, and other factors such as smoking without informing your insurer can cause issues with payment. Make sure you read the details of any policy you take out to make sure you don’t do anything to make your policy invalid.

Mostly there will be no problem, however, and you can easily find out how often different insurance providers pay out on their life cover policies to help you decide who to choose. Many will pay out more than 95% of the time, giving you reassurance that you will be covered.

How can I choose between different insurance companies?

We can help with that. We have reviewed all of the UK’s top insurers in depth to help you make an informed choice about which policy is right for you. When assessing each insurer we focus primarily on their price, range of policies, customer service, and reliability.

Where can I find the best life cover right now?

Right here. If you’re ready to get a quote, then simply click the link below, fill in our short form, and one of our trusted brokers will find you a policy in minutes.