What Is Life Insurance?

Life insurance is a contract between a person and an insurance company. The person makes regular premium payments for the insurance company to provide a lump sum amount, known as a death benefit, to beneficiaries upon the insured person’s death. Life insurance is crucial for managing risk and supporting a family’s future financial needs if the unexpected happens.

What Are The Types of Life Insurance?

There are many types of life insurance policies available. Term life insurance and whole life insurance are the two main types, but there’s also critical illness cover, over 50s life insurance and joint life insurance. Let’s take a look at each type in more detail:

• Term Life Insurance

  Term life insurance provides coverage for a specific period, usually for 10 to 30 years. If you pass away during this period, your beneficiaries receive the death benefit. However, if you outlive the policy term, there is no payout, and the coverage ends. Term life insurance is affordable, offers straightforward coverage and is ideal for temporary financial needs such as paying off a mortgage.

  The types of term life insurance include increasing, decreasing and level term. Increasing term life insurance offers higher payout and premiums as you get older. Decreasing term life insurance provides lower payouts and reduced premiums as you get older. With level term life insurance, payouts and premiums remain the same throughout the policy, no matter what age you pass away. [1]

• Whole Life Insurance

  Whole life insurance, or whole-of-life insurance, offers lifelong coverage for as long as you continue to pay the premiums. It may include a savings component, known as cash value, which grows over time and can be borrowed against or withdrawn. Whole life insurance offers a guaranteed payout to beneficiaries, but it's usually more expensive than term life insurance.

• Critical Illness Cover

  Critical illness cover is an option which can be added to your life insurance policy if you become seriously injured or ill. It pays out a tax-free lump sum payment if you’re diagnosed with a serious illness covered by the policy, such as cancer, heart attack or stroke. This additional cover provides financial support to families if you’re unable to work. It can be used to cover medical expenses, but it can increase the cost of your life insurance policy.

• Over 50s Life Insurance

  Specially designed for people over the age of 50, this type of life insurance is often used to cover funeral costs and outstanding bills or given as an inheritance. Over 50s life insurance guarantees fixed premiums and payout without medical exams.

• Joint Life Insurance

  With joint life insurance, you and your spouse or partner are covered under a single policy. It can be more affordable than two separate policies. However, it’s worth noting that these policies pay out only once, usually after the first death, leaving the surviving partner without life cover.

How Does Life Insurance Work?

When you purchase a life insurance policy, you agree to pay premiums to keep the coverage intact. Premium payments are made monthly, quarterly or annually. In return, should you pass away while the policy is active, your insurance provider pays the death benefit to your designated beneficiaries. These funds are typically tax-free and can be used at your beneficiaries’ discretion. The amount of the death benefit is chosen when you first take out the policy, and the premiums you pay are based in part on your likelihood of dying while the policy is active.

What Does Life Insurance Cover?

Life insurance policies are designed to secure your loved ones financially upon your death. Death benefits can cover various needs such as:

• Funeral costs
• Outstanding debts (e.g., mortgage, car loans, credit card debts)
• Everyday living costs
• Children’s education
• Spouse’s retirement

Do You Need Life Insurance?

Taking out life insurance is not a mandatory requirement, but it is highly recommended if you want to be financially prepared for unexpected events. Consider life insurance if [2]:

• You have dependents who rely on your income, such as children or an unemployed spouse.
• You have significant debts or a mortgage that could be passed on to your family.
• You want to leave an inheritance or provide for your family’s future financial needs.
• You wish to cover funeral costs and reduce the financial burden on your loved ones.

If you have no dependents or significant financial obligations, life insurance may not be necessary. However, it’s still worth considering if you want to leave a plan for final expenses.

When Should You Get Life Insurance?

The best time for getting life insurance varies from person to person, based on their lifestyle, financial needs and family structure. Generally, young and healthy people get more favourable premium rates than people over 50 or those with pre-existing medical conditions. Major life events such as marriage, buying a house, or having a child are popular indicators of when people decide to get a life insurance policy.

How Much Does Life Insurance Cost in the UK?

The cost of a life insurance policy in the UK depends on specific factors including age, health, lifestyle (e.g., whether you are a smoker), coverage amount, the length and type of policy. Life insurance policies can range from £3 to £75 per month. As of September 2024, the average cost of life insurance is £9.38 per month based on a 10-year term, up to £175,000 worth of cover with no critical illness cover. [3]

How To Get Life Insurance?

Getting life insurance is generally a straightforward process:

1. Assess Your Coverage Needs - Determine how much coverage you need based on your financial situation and dependents.
2. Compare Quotes - Shop around for life insurance policies and compare quotes from different insurance providers such as banks, insurance brokers and financial advisers.
3. Choose a Policy - By comparing quotes and different policies, you can choose the best one that fits your needs and budget.
4. Application - Once you have chosen a policy, you can apply for it by filling in paperwork or online forms. Make sure to read the terms and conditions before applying for any policy. By doing so, you will be more aware of any exclusions and the cancellation policy.
5. Make Premium Payments - Once the policy is confirmed, you will be required to make a once-off payment or monthly payments through an electronic fund transfer such as direct debits or online transactions.

How Can A Financial Adviser Help?

A financial adviser is a trained professional who has a wealth of knowledge on life insurance. Seeking advice from a financial adviser can help you:

• Access more life insurance policy options
• Determine the right amount of coverage
• Find the best policy for your needs and budget
• Review your policy if your personal circumstances change

If you are considering speaking to a financial adviser, make sure that they are authorised by the FCA (Financial Authority Conduct). At FinancialAdviser.co.uk, you can search over 15,000 FCA-authorised firms using our FCA database to find a financial adviser near you.