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You don’t have to take out life insurance, but you might want to. Put simply, if you have children or a partner, or other people who rely on your income, you may want to consider it. That’s because your beneficiaries would receive a lump sum of money to help them manage if you and your income are no longer around.

There are some instances where you may be encouraged to have life insurance, such as when you take out a mortgage, but it isn’t compulsory.

No. A life insurance payout can usually be used for whatever beneficiaries choose to use it for. The insurer won’t place conditions on how they spend it.

You may want to mention what you would like it to be used for in your will, or add a letter of wishes to your will. Some insurers also let you document your wishes digitally, so loved ones know what you intended it for, such as buying a relative their first car.

Putting a life insurance policy in a trust can offer you more control over how the money is spent and when the beneficiary receives it.

This will depend on the provider and the policy. Make sure you read the policy documents, so you’re clear on what is and isn’t included. If you’re in any doubt, check with the insurer and ask what the exclusions are.

What’s covered:

• Life insurance pays out if you die within the policy term.
• If the policy has terminal benefit cover, and you are diagnosed with a terminal illness (with a specific life expectancy) the policy will pay out.

What might be covered:

• If you take out life insurance for a mortgage, the insurer may also include free cover between exchange of contracts and when you complete on your property.
• A separation benefit may also be included. This is where you have joint life insurance and your relationship ends. The insurer may let you split the policy into two individual life insurance policies without asking any more health questions.

What’s not covered:

• If you have a term life insurance policy, if you die outside of that period, or stop paying premiums, you get nothing back.
• If someone takes their own life, most insurers have a clause stating they won’t pay out for suicide or self-inflicted injury within a certain period, usually 12 months after the policy start date. After that, a claim for a death through suicide may be considered like any other claim when the policyholder dies.
• If you have life insurance to protect a mortgage and you don’t update the policy in line with any new mortgage arrangement, the payout may not be enough to pay the full outstanding balance.

There is no law to say that you need life insurance when you have a mortgage, though your mortgage provider might recommend that you do. Having life insurance to cover your mortgage means that if you die while you’re covered by the policy, your family would be able to pay off the debt, or keep up with repayments and stay in their home.

You don’t have to use the insurer your mortgage provider recommends. It’s worth getting quotes from other insurers, so you get a competitive price for the cover you need.

Yes, you can have a number of life insurance policies if you want to. This may be useful if, for example, you need more cover later on, such as if you get a mortgage or pay increase, or if you have a life insurance policy provided by your employer but want more cover.

You don’t have to take additional policies out with the same insurer. Bear in mind that if you take out another insurance policy when you are older, your premiums may be higher for the new policy. Also, once you reach a certain cover amount the insurer may make extra checks, such as asking for more health information or for you to have a medical.

Some life insurance companies let you adjust your cover amount without having to take out another policy. Just check that this isn’t more expensive overall than finding a new policy for the extra amount.

» MORE: How multiple life insurance policies work

Insurers might decline a life insurance application for a few reasons. Health and lifestyle issues, such as smoking, a high BMI or current health conditions, or hazardous jobs, are just a few where the insurer might see the risk being too great. But different providers have different criteria, which means that if one insurer declines your application another might not.

Even if you have a pre-existing medical condition, which is a disease, illness or injury you had before taking out the policy, you may still be able to get cover. It just might cost you more, and the insurer may ask for more medical information.

It depends. Most people don’t need a medical examination to be accepted for a life insurance policy. If you’re in good health, it’s unlikely to be needed. Sometimes an insurer will just ask for extra health information from you or a medical report from your GP, with your permission, or a nurse may give you a call to ask a few questions.

If you do need to have a medical examination – perhaps because you have a condition or have been refused life insurance in the past – it’s nothing to worry about. It doesn’t necessarily mean your application won’t be successful, though sometimes certain health conditions can mean an application is declined.

If you’re taking out over 50s life insurance, the insurer won’t usually ask you medical questions or ask you to have a medical examination.

» MORE: Is there life insurance with no medical?

Term life insurance policies have no cash value. You pay premiums and if you outlive your policy, you get no payout and you don’t get your premiums back.

Some whole of life policies let you cash in, or surrender, all or part of your cover while you’re alive. This basically means cancelling the policy and you, the policyholder, receiving the sum rather than your beneficiaries when you die. This is a big step, so talk to a financial adviser if you are considering it.

Also be aware that you may have to pay charges, and it’s possible that your policy’s value could be less than you’ve paid in premiums when you surrender it. If the surrender value is more than total premiums paid, this can have tax implications. So again, it can be worth getting advice before making this decision.

The lump sum payout from a life insurance policy is usually tax-free. This is because it’s not classed as income. Though if your estate is liable for inheritance tax (IHT) after using all the different exemptions and allowances, the life insurance payout is likely to be affected too.

If you put the life insurance policy in a trust, it can help protect the lump sum from IHT because it’s not part of your estate and has its own legal arrangement. The money can go direct to beneficiaries via the trustees, as instructed. This can be useful if you’re leaving money to young people, for example. It also usually means the money will be paid out quicker than the remaining estate.

Trusts can be a complicated area, and once your policy is in a trust it’s difficult to change it, so it can be worth taking financial and legal advice before going ahead.

» MORE: Is life insurance taxable?

When you take out a life insurance policy, you’ll usually be asked to name the people you want the payout to go to, called the beneficiaries. If it’s a joint policy that pays out on first death, the money would be paid to the surviving policyholder.

When you die, your family, or the trustees if the policy is in a trust, can make a claim with the insurer by calling its claims department. They will usually need to supply the insurer with a death certificate.

Once the insurer has accepted a claim if the policy is not written in trust, it then pays the lump sum to the executors or administrators of an estate, who manage the administration of assets in line with the policyholder's will (or the rules of intestacy, if there is no will). The executors will then pay the money to beneficiaries once they have a grant of probate, which is the official permission needed before distributing an estate.

Some insurers will release part of the money early if the family needs it to pay for the funeral.

It’s a good idea to tell your family that you have life insurance. Let them know the name of the provider and the type of policy it is, to help make the admin easier for them when the time comes.