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  • Life insurance pays out a tax-free cash lump sum to help your loved ones manage financially when you’re gone
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What our Nerds say about life insurance

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INSURANCE NERD

If anyone relies on you financially, you'll want to consider life insurance.

The lump sum payout could help your loved ones manage if you die while the policy is in place – whether that’s through paying off the mortgage, or covering wider costs once you and your income are no longer around.

You can apply for life insurance whenever the time is right, but it’s usually cheaper the younger you are, and some insurers have a maximum age you can be insured.

What is life insurance?

Life insurance is a type of cover that can pay out a tax-free lump sum to your loved ones when you die, to help them cope financially.

The money might be used by them for anything from paying off a mortgage or debts to your funeral costs, rent payments and regular household expenses. Some policies also cover a terminal illness diagnosis.

If anyone depends on you financially, you may want to think about getting life insurance, so you know that protection is in place.

How does life insurance work?

When you take out a life insurance policy, you choose a cover amount and agree to make regular monthly payments, called premiums, to the insurer. Then, if you die while you’re covered by the policy, the insurer pays out a tax-free lump sum.

If you have term life insurance, the cover lasts for a specific length of time, such as 20 years. If you die during that time, the insurer would pay out on a valid claim.

Whole of life insurance is a bit different, as it offers a guaranteed payout whenever you die.

Are you eligible for life insurance?

This will depend on the insurer and the type of life insurance policy you choose, though you will usually need to be a UK resident, with permission to live in the UK permanently.

You must also be at least 18 and, of course, over 50s life insurance is only for those aged 50 and over. Maximum ages will depend on the insurer and the policy, and your age when you take out the policy.

What types of life insurance are there?

There are two main types of life insurance. You’ll want to choose the one that’s right for your finances and family.

Term life insurance

With term life insurance, you are covered for a set period of time, usually between 10 years and 25 years, and choose a cover amount. The insurer will pay out on a valid claim if you die during that time.

There is decreasing, level or increasing term life insurance, depending on what you need the sum to cover:

  • Decreasing cover is designed to cover a repayment mortgage or other loan you pay off over time. So the amount the policy would pay out also decreases over time, broadly in line with what you owe.
  • Level cover is a fixed lump sum that might help your family maintain their standard of living and go towards regular outgoings and more. The cover amount stays the same for the whole policy term.
  • Increasing cover lets you protect the cover amount from the effects of inflation, so it won’t buy less over time. The cover amount rises alongside the inflation rate or by a fixed amount each year, and your premiums rise to reflect that (usually up to a maximum amount).

It’s important to know that if you outlive a term life insurance policy, you won’t get a payout or your premiums back. The policy only pays out if you die during the term you’re covered. If your policy also has a terminal illness benefit, it will pay out if you are diagnosed with a terminal illness with a certain life expectancy.

Whole of life insurance

Also called life assurance, this cover pays out a lump sum when you die, whenever you die. This means a guaranteed payout, provided you keep up with your premiums. Over 50s life insurance is a type of whole of life cover. While this might sound a safer bet, whole of life policies tend to cost more than term life insurance.

» MORE: How to choose the right type of life insurance

How much life insurance do you need?

The cover amount you choose depends on what you’d like to cover and the premium you can afford. You may just want to make sure the mortgage is covered, so your family could pay it off or continue to make payments. Or you might want it to also be enough to pay wider costs and outgoings, or your lost income, so your family can keep up their standard of living.

Take your time and factor in costs such as what’s left to pay on your mortgage or your rent payments, or any outstanding debts. You may also want to include household bills, funeral costs, education fees and general family living expenses. Factor in any other life insurance policies you already have, such as a death in service benefit through your employer.

If you’re not sure what figure to choose, you can talk to an adviser at LifeSearch for guidance.

How much does life insurance cost?

The premium you pay for cover will depend on a few factors. Front of mind should be getting the right level of cover for you and your family and making sure you can afford the monthly payments. You’ll be paying the premium for a number of years, so it needs to be a figure you’re comfortable with.

You can get an idea of the premiums you might pay for a term life insurance policy by running a quick quote.

There are a few things a life insurance company will consider about your personal circumstances when they set up your policy and work out your premium, including your:

  • Age: The price goes up as you get older, but once you secure your premium you will pay the same amount as you get older, even if you develop health problems.
  • Health: Whether you have any specific health conditions or pre-existing conditions.
  • Lifestyle: If you smoke and how much alcohol you drink, and any risky hobbies.
  • Job: A dangerous job might increase your premiums.

When it comes to the cover you choose, the price you pay will also depend on a few other factors, including:

  • your cover term
  • your cover amount
  • whether it’s term or whole of life cover
  • whether you choose decreasing cover, level cover or increasing cover

Do you need to take out life insurance?

You don’t have to take out life insurance. But if anyone depends on you financially, or if you share finances with anyone else, it can be a good idea. This is especially the case if you’re the main income provider in your household, so you can help reduce the financial impact on your partner, family or children when you die. But even if you share financial responsibilities, such as a mortgage or paying rent, it could provide an invaluable safety net at a difficult time.

According to the Association of British Insurers (ABI) and Group Risk Development (GRiD), in 2021 insurers paid out over £3.8 billion in term life insurance claims to families to help them cope financially, with an average payout of £80,485.

If you get a mortgage or even apply for a long-term loan, the provider may recommend that you consider life insurance to cover your mortgage. This is so they know there would be the funds to pay off the remaining balance if you passed away.

Life insurance isn’t right for everyone, though. You might not feel it’s worthwhile if the following applies:

  • You’re single and there is nobody who depends on you financially.
  • You’re on a low income and may be eligible for state benefits.
  • Your partner earns enough to support themselves and any children you have.
  • You think your assets or savings offer enough financial help when you pass away.
  • You have a death-in-service benefit with your employer that pays out if you die while you are their employee.

When should you take out life insurance?

There are typical milestones when people tend to think about taking out cover. These include buying a home, having children and marriage or civil partnership.

That’s because these life events bring extra financial responsibilities. But there are lots of reasons why you might think it’s time, and not everyone gets around to sorting it out straight away.

Of course, as life changes, such as if you get a salary increase, have more children, or your relationship changes, you may want to adjust your cover after you’ve taken out a policy. This will make sure the cover still matches your needs.

It’s a good idea to speak to a financial adviser before you make this type of change, and whether you can do it depends on a few things. You can, however, have more than one life insurance policy if you need to take out separate, additional cover.

» MORE: How many life cover policies can you have?

What do you need to get a life insurance quote?

When you get a quote with LifeSearch, you’ll be asked a few simple questions. These include your contact details, whether you smoke, and if you want a single or joint policy. You will also have the option of adding critical illness cover.

You can use our life insurance calculator when you get a quote to get a ballpark figure for the amount of cover you need. Have some information handy about what you owe on a mortgage or other loans, any existing life insurance, savings or investments, and what you might want to put towards your funeral costs, for example. You will then get an estimated cover amount.

If you go on to apply for cover, the insurer will ask a few more questions, to help them decide whether to offer you cover and what your premium will be. This will include a bit more information about your health and lifestyle.

How can you get cheaper life insurance?

Generally, you’ll secure a lower premium if you:

  • take out cover when you are younger
  • don’t smoke and aren’t a heavy drinker
  • have a healthy lifestyle
  • don’t have any pre-existing medical conditions
  • don’t have a risky job or hobby
  • don’t get more cover than you need

There are cover choices you can make that will affect the price of your premiums. For example, choosing decreasing rather than level cover, a single policy rather than a joint policy, and a shorter cover term. But it’s no good getting cheap life insurance if it doesn’t cover what you need it to cover. And not everyone is in a position to take out life insurance in their 20s or is in peak health.

When you get a life insurance quote, answer every question as accurately and honestly as you can. Otherwise, the insurer could refuse your application, increase your premium, cancel your policy, not pay the claim in full, or even not pay out.

To get the cover you need, for the lowest price, a good strategy is to compare quote prices across insurers. That way you’re not compromising on your cover; you’re just looking for a competitive price. Remember that quote prices can change once the insurer asks more questions about you and your cover.

How can you compare life insurance policies?

It’s easy to get a quote. Just choose ‘Get a quote’ at the top of the page and answer a few short questions to help you choose the type of cover you want a quote for. LifeSearch will run quotes best matched to you, with an estimated price from top UK insurers. You’ll also receive an email with your results, so it’s easy to compare and then apply.

When you’re comparing quotes, it’s important to read the product documents. It’s crucial that you are clear about what is and isn’t covered by your policy, and to check if it has the right level of cover for you.

Some providers offer incentives, such as vouchers and health tools. These can be useful, but a life insurance policy is a big commitment over many years, so you’ll want to get the fundamentals right first. If you have any questions or are unsure about anything, you can call a LifeSearch adviser.

Life Insurance FAQs

Do I need to take out life insurance?

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.

Does the insurer tell people what to spend the payout on?

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.

What is and isn’t covered by life insurance?

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.

Do I need life insurance to get a mortgage?

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.

Can you have more than one life insurance policy?

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

Why might a life insurance application be declined?

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.

Will I need a medical to get life insurance?

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?

Can you cash in on life insurance?

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.

Do you pay tax on life insurance payouts?

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?

How will my loved ones get the life insurance payout after death?

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.

About the author

Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years. Read more

This life insurance comparison and quote service is presented via our partnership with LifeSearch Limited. The information you provide is used to generate quotes from LifeSearch. Nerdwallet Ltd does not form part of the service beyond presenting quotes.

LifeSearch Limited is registered at Wentworth House 440 Parkway, Solent Business Park, Whitely, Hampshire PO15 7FJ and is an Appointed Representative of LifeSearch Partners Limited and regulated under the Financial Conduct Authority ref: 402349.

LifeSearch Limited is not part of Nerdwallet Ltd or other Nerdwallet entities.

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