What is life insurance?
Key takeaways
Life insurance is an insurance policy that provides a tax-free lump sum payment to your loved ones if you die during the term of the policy.
The main types of life insurance are: whole life insurance, term life insurance, decreasing term life insurance, and joint life insurance
Life insurance can cost as little as £2.69
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What is life insurance?
Life insurance cover is a type of financial protection that pays out a tax-free lump sum if you die during the policy term. It's designed to help ease the financial burden on your loved ones by covering essential costs such as mortgage payments, everyday living expenses, or childcare.
This can provide peace of mind, knowing your family would have some financial stability if the worst were to happen.
Choosing the right policy depends on your personal circumstances, including your financial commitments and the needs of your dependants.
How does life insurance work?
Here’s a step-by-step guide to how life insurance works:
Work out how much cover you need
Consider your financial responsibilities - such as a mortgage, debts, living expenses, or dependents - to determine how much cover you need and for how long. To determine how much cover you need, you can use MoneySuperMarket’s life insurance calculator.
Choose the type of policy
Research different types of life insurance - such as whole of life or term insurance - and decide which best suits your situation.
Note any exclusions
Life insurance policies typically cover most causes of death, but common exclusions include death by suicide within the first 12 or 24 months, death resulting from undisclosed health conditions or risky lifestyles, involvement in criminal activity, substance abuse, or dangerous hobbies that weren’t declared.
Compare policies
Use a comparison site such as Moneysupermarket get a life insurance quote from various providers. You’ll need to provide personal and health information, including your family medical history, lifestyle, and whether you smoke.
You can sometimes add critical illness cover for an extra cost.
You might want to seek advice from a financial adviser or contact insurance providers directly.
Buy a policy
When you buy life insurance you need to name a beneficiary or beneficiaries who will receive the payout when you die. This will usually be your spouse or children, but can be anyone.
You’ll need to keep making your monthly payments to keep the policy active. As long as you continue to pay your monthly premium, your policy stays active and will pay out if you die during the term (or at any point, for whole-of-life cover).
Making a claim
If you die while covered, the named beneficiaries on the policy (usually family members) need too contact the insurer with a death certificate and complete a claims form. Some policies will pay out earlier (before death) if you have terminal illness.
Payout is made
After verifying the claim, the insurer pays the agreed lump sum to your beneficiaries.
Different types of life insurance
There are several types of life insurance available:
Level term life insurance
Term life insurance policies last for a set number of years. If you die within this term, your loved ones receive a lump sum. With level term insurance, the payout amount remains the same regardless of how long you've been paying into the policy.
Decreasing term life insurance
In decreasing term cover, the cash lump sum amount decreases over time. This is typically a cheaper option and is often used to cover a repayment mortgage. As you pay off more of your mortgage, your family will need less to settle the debt if you die.
Whole of life insurance
Whole of life insurance is a type of life insurance policy that guarantees a payout to your loved ones whenever you die, as long as you continue to pay the life insurance premiums. Unlike term life insurance, which only covers you for a set period, whole of life cover lasts for the rest of your life. It is sometimes called life assurance.
Premiums can be higher than term insurance because a payout is guaranteed.
Joint life insurance
Joint insurance covers two people under one policy. If one person dies, the other receives the lump sum. It can be level or decreasing term, and it's often cheaper than two single policies. However, most joint policies only pay out a sum of money once - on the first death.
What are the benefits of life insurance?
Life insurance offers financial protection for your loved ones by providing a tax-free lump sum if you pass away during the policy term.
This money can help cover expenses like mortgage payments, bills, childcare, or funeral costs, easing the financial burden at a difficult time. It’s especially important for families, homeowners, or anyone with dependants who rely on their income.
Life insurance can also play a role in inheritance planning, helping to leave a financial legacy or cover inheritance tax.
Do I need life insurance?
Life insurance is important for anyone who has people who depend on them financially. This includes parents with young children, couples with a mortgage, or anyone whose income supports a partner or family.
Even stay-at-home parents may need life insurance, as their contribution to the household (like childcare or housework) would be costly to replace.
If your absence would cause financial difficulty for someone else, life insurance is worth considering.
If you are single with no children, you usually won’t need life insurance. You might want to consider other protection policies instead, such as income protection or critical illness cover.
Who can get life insurance?
Most adults over 18 can get life insurance, typically up to the age of 85, although the exact age range varies by insurer.
Your age, health, lifestyle, and medical history will affect your eligibility and the cost of your premiums.
Life insurance policies for younger people are usually cheaper and can last for many years.
For those aged 50 or above, there are specialist over 50s life insurance policies available. These are typically whole of life cover, which is more expensive because it's guaranteed to pay out at some point.
Regardless of your age, you can find the life insurance policy that suits your needs. Provide us with a few details, and we'll find the best policy for you.
How much does life insurance cost?
The cost of life insurance varies depending on several factors, but policies can start from as little as £5 to £10 per month. The exact premium you’ll pay depends on:
Your age – Younger people generally pay less.
Health and lifestyle – Smokers or those with medical conditions usually pay more.
Amount of cover – Higher payouts or longer terms increase the cost.
Type of policy – Whole of life insurance is typically more expensive than term cover.
Occupation and hobbies – Riskier jobs or activities may raise your premium.
What should I consider when buying life insurance?
When buying life insurance, consider the following key factors to ensure you choose the right policy for your needs:
The amount of money your family will need in your absence
Type of cover
Level of cover
Length of the policy
The importance of declaring your medical history
Affordability
How can I find the best life insurance deal?
Life insurance is about protecting your loved ones and providing them with security should the worst happen. It's offers peace of mind, knowing that they will be taken care of financially. When looking for life insurance deals, remember that the cheapest option may not always offer the best cover. It's worth considering paying a little more to ensure that your family has adequate support.
Author
Rachel Ditchburn
Former Senior Commercial Manager
Rachel is a former Senior Commercial Manager at MoneySuperMarket, where she oversaw the Protection, Pet and Leisure Insurance channels. Outside of work, Rachel is a keen cook and enjoys live music,...
Reviewer
Emma Lunn
Personal finance expert
Emma has written about personal finance for almost 20 years, with a career spanning several recessions and their inevitable consequences. Emma’s main focus is helping people learn to manage their...
