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Life insurance explained

Fiona Leake
Written by Fiona Leake

Life insurance is a brilliant way to financially protect your loved ones whilst giving you peace of mind. However, many put off getting it, thinking that they do not require it or find it too confusing. This is why we are here to help with our comprehensive life insurance guide.

Life insurance is very important for many people. It can allow you to leave money to your loved ones and help if there’s still a mortgage to pay after you have passed. 

Read this guide to help you understand the ins and outs. Let’s take a look at the average cost of life insurance in the UK, what policy is best for you and some top tips.

What is life insurance? 

A life insurance policy is a contract agreement between yourself and your insurance company. Essentially, you will pay monthly premiums and meet any terms and conditions stated within the policy. In exchange, the insurance provider will provide a lump-sum payment, also known as a death benefit, to your beneficiaries upon your death. 

The death benefit money can be spent however your beneficiaries see fit. This could be anything from paying off a remaining mortgage, covering funeral costs, or footing the household bills. 

How do I get life insurance? 

Getting life insurance is a fairly straightforward process, but there are a few things to keep in mind.

With so many different life insurance policies on offer, you will need to choose one that most fits your needs.

Once you have selected a policy that works for you, there will be a few options that will ultimately affect the final cost of your insurance. For example, how much the lump-sum will be and how long the agreement lasts.

You should compare the costs and offers of different life insurance companies. It’s important to disclose any medical conditions, and be honest about your general health/habits when applying. Whilst medical conditions will raise your premiums, not disclosing any could result in your families payout being withheld. 

You will then pay monthly premiums that will allow the insurance company to pay your loved ones a death benefit when you pass away.

Average life insurance cost

So, how much is your life insurance policy likely to cost? 

This depends on a variety of different things, including personal circumstances and the type of cover that you require. 

The following factors will affect the cost of your life insurance: 

  • If you have existing health conditions such as high blood pressure or diabetes

  • Whether you smoke or not 

  • Your age (the younger you are, the cheaper the insurance) 

  • The amount of cover you need - £30,000 cover will be cheaper than £300,000

  • The type of life insurance 

  • The length of the term 

Taking this into account, let’s take a look at how much £100,000 life insurance costs. 

If you are 30 years old, a non-smoker with no pre-existing medical conditions, then £100,000 of whole life assurance could cost you on average £34.25 a month. 

This figure will vary largely depending on your circumstances and requirements. It’s always worth shopping around for different prices and policies. 

Do I need life insurance?

It’s very much a personal choice when deciding whether or not you need life insurance. 

Some people see life insurance as an unnecessary additional monthly cost to their bills. However, for many, it is worth it for the peace of mind and security it offers their family. 

For example, you may be the primary breadwinner for your family. If you were to pass away suddenly, this could potentially leave your loved ones in a vulnerable position with a mortgage and bills they can’t afford.

Having said this, life insurance isn’t only for those who have a mortgage. When you get married or have a baby, you might want to consider life insurance for those who rely on you. If you have dependants, it’s likely that getting life insurance is a wise decision.

What is the best life insurance policy for me?

There are many different types of life insurance policies and deciding which is best for you depends on what you are looking for. 

The top 5 most common life insurance types can be seen below. 

1. Term life insurance 

Term assurance will guarantee your family a lump-sum payment if you die within a specific time period. 

For example, you might set your period at 20 years with an agreed sum of £100,000. 

This type of life insurance is often used by those who want their family to be able to cover the mortgage if they pass away. Most mortgages only last up to 25 years, which is why term insurance is a good option. 

Limiting the term of life insurance also means that premiums are likely to be lower than other policies. 

This type of life insurance is simple and affordable for most people. If you have dependants or an interest only mortgage, this could be a good option. 

2. Decreasing-term life insurance or mortgage life insurance

This differs from term insurance because the agreed sum payout will decrease over the term of the policy. 

For example, you may have a £100,000 mortgage and get life insurance for 20 years. This £100,000 mortgage is likely to be paid off significantly by the end of the 20 years. Therefore, decreasing-term insurance prevents you from being ‘over-insured’ when you eventually pass away. 

If you were to pass away 19 years into your decreasing-term insurance, for example, the payout to your family will have reduced significantly. 

This is a cheaper option to term insurance as your monthly premiums decrease as each year the payout reduces. 

However, this type of insurance will typically only cover your remaining mortgage balance when you pass away. So, if your dependants can afford other expenses and only need help with the mortgage if you pass away, then decreasing-term insurance might be for you. This isn’t the right option for you if you want to leave some extra money to your family or have other debts including your mortgage that need paying. 

3. Increasing-term life insurance 

On the other hand, you might be looking to have your lump-sum payout to your family increase each year of your insurance. 

So, if you take out life insurance over 20 years for £100,000, you could have this increase each year that goes by. This could be to reflect inflation, or you could choose a set percent rise each year.

Obviously, this will mean that your premiums will also increase each year. 

If you have a large mortgage, debts and lots of expenses, then increasing-term insurance might be the right option for you. Essentially, if you need to leave a lot of money to your family, this gradual increase each year could work well. 

4. Renewable term life insurance 

This is a life insurance policy that will provide you with cover for a fixed period, but has an option to extend at the end of the period. This option to extend will be without the need for further medical checks.

Whilst the premiums may increase to reflect your age if you choose to extend, you won’t be required to disclose any new health problems. This means that your premiums should not dramatically increase. 

You might want renewable term insurance if your situation when you take out the life insurance is the same as when the policy ends. For example, if you still have dependants, a mortgage and debts etc. Therefore, you might want to extend the policy. 

5. Joint life insurance 

If you are married, you might consider taking out joint life insurance. This single policy will payout an agreed lump-sum if you or your partner were to pass away. 

This can be cheaper than taking out two separate policies and paying premiums on both. However, this joint policy will only pay out once. After the first death, the cover will then end. 

How much life insurance do I need?

Once you’ve taken into account the different types of life insurance, you might be wondering how much and for how long you will need your insurance. 

When considering how much you would like the death benefit to be, you will need to take note of a few things. This could include whether you have a mortgage, any debts and how much your loved ones will require to live comfortably after you die. 

The more money you want paying out to your family, the higher the premiums will be.  

In terms of how long you want the policy to last, it really depends on what it’s for. If it’s to cover your mortgage after you pass away, it's worth making the insurance last as long as your mortgage term is. 

Tips for getting life insurance

There are a lot of things to consider when deciding to take out a life insurance policy. Below are some of our top tips to help you get the most out of your life insurance: 

  • Be honest with your insurance company - do not be tempted to lie about any medical conditions or hide that you smoke in order to reduce the monthly premiums. If your insurer discovers the truth upon your death, your loved ones might not receive any money 

  • Consider writing your life insurance policy in trust - you can save on both tax and hassle by writing your life insurance into a trust. Your loved ones will be charged the lowest possible tax on the money when you die and can easily get hold of the payout

  • Read the small print - before signing your life insurance policy, make sure that you know who will receive the money and how soon after you pass 

  • Avoid over-insuring - whilst it may be tempting to leave a huge lump sum to your family after you die, remember you will be paying extremely high premiums. 

  • Choose guaranteed premiums - try to find a life insurance policy that keeps the same premiums year after year to avoid unpredictable rises 

  • Buy life insurance when you’re young - your premiums will be the lowest when you are young and you’ll be able to leave much more to your loved ones 

Life insurance FAQ

How do life insurance companies make money?

Life insurance companies make their money by investing your monthly premiums into various low-risk areas. This often means that the company will pay the lump-sum to your family after you die using only the money they made from investments. 

Essentially, they make money off the money you pay them. 

Does life insurance pay out for suicidal death?

Despite the popular belief that it doesn’t, life insurance does pay out a lump-sum to loved ones in the case of suicide. Every policy is different and it’s worth reading the terms and conditions. 

Most policies will contain a ‘suicide clause’ which sets out a time period from the beginning of the policy in which if a suicide takes place, there will be no payout. This period is often between 12 and 24 months. 

After this time period the lump-sum will be paid. However, if the insurance company discovers a history of mental health problems that you did not disclose, your payout could be withheld. 

This is why it’s so important to be honest when applying for life insurance. 

Do I need life insurance to buy a house?

You do not need life insurance in order to take out a mortgage. However, once you get a mortgage, it’s worth considering to help loved ones pay for the mortgage if you were to die. 

Can I cancel life insurance? 

Yes. Most life insurance policies are classed as ‘pure protection’. This means that you are only covered for the period that you pay your premiums and there’s no savings or investment. Therefore, if you stop paying the premiums, the policy stops. 

Of course, every policy is different so read the small print! 

Can I have more than one life insurance policy? 

It is perfectly legal to have more than one life insurance policy. Sometimes having multiple life insurance policies can make sense and give you further flexibility. It’s worth noting that multiple policies don’t cancel each other out, rather they can work together to give you the most comprehensive cover. 

What is a life insurance trust?

One option when taking out life insurance is to put the policy in a trust. Basically, a trust allows you to set aside an asset to leave to your family, for example. 

This ‘asset’ could be your life insurance policy. Some people put their life insurance into a trust as it allows their family to potentially avoid inheritance tax. 

Also, the payout will not need to go through a probate after you die, meaning that your loved ones can access the money much quicker. 

Life insurance and COVID-19

During the coronavirus pandemic, many people have considered the need for life insurance due to the uncertain times we find ourselves in. 

Thankfully, you can still get life insurance during the current pandemic. It’s important to note that some insurance companies are adjusting their policies so make sure you always read the details. 

If you are travelling to or live in a high-risk area, this could also affect the cost of your premiums or the likelihood of being approved. 

This shouldn’t discourage you from getting life insurance during these times, it’s always worth the peace of mind for yourself and your family. 

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25th August 2020