What is life insurance?

Life insurance is a policy to protect your family and dependants’ financial security by leaving them a lump sum if you pass away.

With life cover you are insured from the moment you purchase your policy, meaning you will have the peace of mind that those you care about most will be looked after.

This will help them continue their lives once you are gone and protect the legacy you were building for them.

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Types of Life Insurance

Term Life Insurance

Level Term: Pays out a fixed sum if you die within the term of the policy.

Decreasing Term: The payout reduces over time, usually aligned with a debt such as a mortgage.

Whole of Life Insurance

This type of policy covers you for your entire life and guarantees a payout upon death.

Key Considerations

Purpose: Determine why you need life insurance. Common reasons include covering debts (like a mortgage), providing for dependents, or covering funeral costs.

Coverage Amount: Calculate how much cover you need. Consider your debts, living expenses, future expenses (like education costs), and any other financial responsibilities.

Policy Term: Decide on the length of the policy if you opt for term insurance. This might align with significant financial obligations, such as the length of your mortgage.

Premiums: Premiums can be fixed or variable. Ensure you can afford the premiums for the entire term of the policy.

Health and Lifestyle: Your health, age, and lifestyle affect premiums. Smokers, for example, typically pay higher premiums.

Common Questions

What happens if I miss a payment?

Policies usually have a grace period, but if you miss multiple payments, the policy may lapse. Contact your insurer immediately if you’re having trouble with payments.

Can I change my policy later?

Some policies allow amendments, like increasing coverage or extending the term, though this might affect premiums.

Are there exclusions?

Yes, common exclusions include death due to suicide within the first year, risky activities, and sometimes pre-existing conditions.

Benefits of Life Insurance

Peace of mind

One of the main benefits is having peace of mind that your family has a financial safety net if you die. This may be particularly important if your partner or children are financially dependent on you.

A critical illness policy may also offer peace of mind by helping you meet your financial obligations if you are unable to work due to serious illness or injury.

Cover financial commitments

A life insurance policy can cover financial commitments such as everyday living costs, mortgage and loan repayments or one-off expenses such as replacing a car. This support may help your dependents to maintain a similar standard of living if they suffer a fall in household income. A 'whole of life cover plan' whilst more expensive will payout a significant lump sum to your chosen beneficiary regardless of when you die. This lump sum could make an immeasurable difference to them in life after your death.

Pay off a mortgage and other debts

Life insurance can also help to repay any debts on your death. According to the Institute for Fiscal Studies, over 14 million people in the UK currently have a mortgage and life insurance may ensure that your family can stay in their house.

Mortgage debts have increased with the boom in property prices over the last decade.

The latest Bank of England figures reveal that over 60% of joint mortgage holders have a mortgage of at least three times their salary, while over a quarter of single mortgage holders have a mortgage that’s four times or more their salary.

The life insurance policy can also be tailored to the type of mortgage. Homeowners with a traditional repayment mortgage (where both capital and interest is repaid each month) may consider a decreasing term policy which reduces as the outstanding mortgage debt decreases over time.

However, homeowners with an interest-only mortgage (where the capital debt does not reduce) might look at level cover where the amount remains the same throughout the life of the mortgage.

Cover funeral expenses

The average cost of a basic funeral is just under £4,000, according to research by Sun Life, rising to £4,800 if it’s a burial. Add in professional fees, catering, flowers and a wake, and the average cost rockets to £9,200.

That’s why, according to a survey by Direct Line, one of the primary reasons for taking out life insurance is to pay for funeral expenses.

Supplement savings

With the rise in the cost of living over the last few years, it has become increasingly challenging to put money aside for a rainy day.

A survey by the Office for National Statistics (ONS) revealed that more than 40% of households forecast that they will not be able to save money in the next year. And the average value of savings accounts in the UK stands at just over £5,000.

A life insurance policy can provide an alternative way of leaving money to your dependents to money built up in savings accounts. Contributing regular monthly premiums to a life insurance policy may also be easier to budget for than ad-hoc contributions to savings.

Inheritance tax planning

A life policy can be used to pay inheritance due on your estate after death. For example, you could take out a £100,000 whole of life cover that could be used to pay for inheritance tax obligations.

Life insurance policies may also be ‘written in trust’ to remove them from your estate for inheritance tax purposes. A trust passes legal ownership of the policy to the beneficiaries you nominate and it is not therefore counted in your estate.

This can mean a considerable tax saving. For example, you’d typically pay 40% on the value of your estate above £325,000 in the current tax year (excluding an additional allowance for property in certain circumstances).

The beneficiaries of the trust will often receive the money more quickly than through the probate process after a death. Although setting up a life insurance policy in trust is usually straightforward, there are legal and tax consequences so you should take financial and legal advice.