Everything you need to know about life insurance

We answer some of the most frequently asked questions about life insurance.

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Our guide explains all you need to know about this important form of cover.

What does life insurance cover?

Life insurance is a way of helping your family cope financially when you die. It is intended to provide help to your loved ones when they can’t rely on your salary or income any longer.

The payout can be used to clear debts, pay off the mortgage or just cover everyday expenses. It could even pay for your funeral if you haven’t set anything aside for that.

Should I bother with life insurance?

If you are single with no one depending on your income, then you probably don’t need life insurance.

However, if you have a partner or family who may struggle to cope financially, then life insurance could offer the help they need at a very difficult time.

Can I get life insurance through my employer?

It depends, your employer might offer death-in-service benefit – this pays out a lump sum, usually four times your annual salary if you die while in employment.

While it can be a valuable benefit, you might need to take out additional cover depending on certain factors, such as how much you owe on your mortgage, as well as any financial provisions for your dependants’ future.

Read: Death-in-service

What is term insurance?

Term policies, the most common type of life insurance, only pay out if you die within the duration stated. For example, if you take out a policy for 25 years, then your family can claim if you die during this 25-year period.

However, if you die after this term then there would be no payout.

Does the payout stay the same no matter when you die?

It is dependent on the life insurance policy you buy. If you buy level term insurance, then the payout is the same whether you die in year one or the 25th year.

A cheaper alternative is decreasing term insurance, where the payout gradually becomes smaller over the years.

If, for example, you choose a decreasing level policy, then it is often linked to a repayment mortgage because the amount you owe the lender also decreases over time.   

Another option is amily income benefit, which pays an income much like a monthly salary rather than a lump sum, from the time of the claim until the end of the term.

This is even cheaper than level or decreasing term insurance because the amount being paid out by the insurer is expected to be less overall. 

Life insurance types infographic

How do I decide the length of the term?

You’ll need to consider exactly what you want it for. Maybe you want to make sure the policy lasts as long as your mortgage repayments.

Or perhaps linked to your children’s age, so that it won’t expire until they have finished school, turned 18 years old, or finished university.

Of course, your own age will have an impact on your decision.

Can I buy life insurance that will payout whenever I die?

Yes, it is called whole-of-life assurance. Your family can claim for your policy no matter when you die, unrestricted by a policy term.

It is normally more expensive than term insurance, as the insurer knows it will have to pay out eventually.

Are life insurance premiums fixed?

Level and decreasing term insurance, and family income benefit policies, usually have guaranteed fixed premiums throughout the policy term.

That said, check the small print as some firms offer ‘reviewable’ premiums, which can be reviewed every 5-10 years and normally go up in price.

But whole-of-life assurance is slightly different because it is typically linked to a specific investment. So if the investment does not perform well, then the premium is likely to increase so the insurer doesn’t lose money.

How much life insurance do I need?

It all depends on your personal circumstances as the amount of cover, also known as the ‘sum insured’ can be different for each family.

Let’s say you are married, have a large mortgage and four children, you are going to need more cover than a single parent with a two bedroom flat with one child.

Most of the time, the recommended amount to be insured is 10 times your annual salary or income. But obviously, you should make more detailed calculations to make sure you are fully covered. 

Read: How to calculate the amount of life insurance you’ll need

How much does life insurance cost?

Your premium will vary depending on the type of policy, the size of the sum insured and also the risk of a claim – if you have a dangerous job, for example.

Also, age is a factor, so life insurance will be more expensive for an older person. Similarly, if a customer is in poor health, they can expect to pay a higher premium.

The insurer will take into account occupation, hobbies, lifestyle – such as weight and fitness – to help determine their premiums.

Even postcodes are checked, as certain areas of the country are more likely to claim. 

Life insurance costs infographic

Can I still take out life insurance if I am already unwell?

In truth, it can be difficult to find affordable life insurance if you have a pre-existing medical condition, especially a serious one.

Some insurers will just turn you down outright, while others will exclude the condition itself. For example, if you had diabetes, the policy would not payout if you died from the disease.

You would be covered if your death was not related to your condition, or could be proven not to be.

Nevertheless, there are a number of specialists who offer life insurance to those with pre-existing conditions, but be prepared to pay higher premiums because of the high risk of a claim.

There are a number of specialist insurers that offer life cover to people with pre-existing conditions, but you should be prepared to pay a higher price because of the higher risk of a claim.

Can older people buy life insurance?

Yes, but life insurance premiums rise with age and older people will almost certainly pay more for cover.

It is still possible to take out life insurance when you are in your 50s, and some firms will accept without medical or health questions.

Read: Over 50’s assurance

Can I insure my partner?

Many couples take out joint life insurance, due to convenience and the fact it is normally cheaper.

It is worth noting though, that joint life insurance only pays out once (at the first death), and leaves the surviving partner without insurance. 

It is then more than likely that when the survivor wishes to take out new insurance, the premiums will be expensive, because the person will be older and/or in a worse state of health.

Can the policy pay out a regular income rather than a lump sum?

If you opt for family income benefit, then yes, your beneficiaries will receive an income much like a salary on your death.

It is often easier to manage than a lump sum because you don’t need to worry about investing or management fees.

Plus, as already noted above, premiums are typically cheaper because the longer you live, the less the insurer has to pay.

If, for instance, you take a £30,000 a year policy for 25 years then died in year 20, then the insurer would only pay for five years.

Will my family have to pay tax on any life insurance payout?

Proceeds from a life insurance claim are free from income and capital gains tax, however, they can be counted as part of your estate and therefore potentially liable for inheritance tax (IHT).

It is easy to side step IHT by writing the policy ‘in trust’, meaning it is not taken as part of your estate when you die.

Read: Life insurance & tax

Can I make changes to my policy?

While you can usually make amendments to your policy, it might result in higher premiums.

Additionally, you should also keep your insurer up to date with any changes in circumstance or you might invalidate the cover.

So it is a good idea to regularly review your policy to make any changes you might need, such as marriage, a new home or a new addition to the family.

Are there any common exclusions?

Always read the small print of any life insurance policy to understand the level of cover and the exclusions.

As many insurers will not pay out if you die as a result of alcohol abuse, suicide or a drug-related death.

It is also difficult to get cover for a pre-existing medical condition, or if you die as a result of a dangerous sport or hobby.

What is critical illness cover?

Critical illness cover pays out a lump sum if you are diagnosed with a serious condition during the policy term. However, most policies only pay out once, so if you did claim then your family would not be able to claim again on your death.

Also, the list of conditions is not exhaustive, so check the small print for what is listed.

Read: Do I need critical illness cover?

Are there any other policy add-ons?

Rather than critical illness cover, you can also add terminal illness cover – where you receive a payout on being diagnosed with a terminal, life-ending illness or condition.

Another common add-on is waiver of premium, which helps pay the premium when you are unable to work due to illness or injury.

Life insurance premiums graph

How do I cut the cost of life insurance?

It makes sense to buy life insurance as young as possible as older people pay more for their premiums. So in your 20s & 30s rather than your 50s.

Improving your health, such as losing weight and giving up smoking, can also reduce your premiums.

Another money-saving tip is to shop around. It’s easy with MoneySuperMarket’s free independent comparison service.

Premiums vary from insurer to insurer so you can often save money if you compare prices. We can help you get a great deal on your life insurance in a matter of minutes.

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