What is life insurance?

Life insurance (also called life cover or life assurance) is a policy that pays out a lump sum of money to your chosen beneficiaries when you die. The purpose is to provide financial security for your family, helping them maintain their lifestyle and cover essential expenses after you're gone.

Here's how it works:

1. Choose your coverage amount: Decide how much money your family would need (typically 10-15x your annual income)
2. Select your policy term: How long you need cover for (e.g. 20 years until mortgage is paid off)
3. Pay monthly premiums: Typically £10-£50 per month depending on age, health, and coverage
4. Policy pays out when you die: Your beneficiaries receive the full lump sum tax-free

Who needs life insurance:

• Anyone with a mortgage or significant debts
• Parents with children who depend on their income
• People whose partners couldn't maintain their lifestyle alone
• Business owners with financial obligations
• Anyone who wants to leave money for funeral costs or inheritance

Types of life insurance

There are four main types of life insurance in the UK, each suited to different circumstances:

Life Insurance Types Comparison

Most people choose level term life insurance because it provides straightforward, affordable protection with a fixed payout. Decreasing term is popular for mortgage protection because the payout reduces in line with your outstanding mortgage balance.

Family Income Benefit is ideal if you want to provide a regular monthly income rather than a lump sum - this can be more tax-efficient and helps ensure money isn't spent all at once.

Whole of life insurance is the only type that guarantees a payout (since everyone eventually dies), making it useful for inheritance tax planning, but it's significantly more expensive.

How much life insurance do you need?

The right amount of life insurance depends on your family's financial needs and obligations. Here's how to calculate what you need:

More precise calculation:

1. Calculate your debts: Mortgage balance + loans + credit cards (e.g. £250,000 mortgage + £15,000 car loan = £265,000)
2. Estimate income replacement: How many years your family needs support × annual income needed (e.g. 15 years × £30,000 = £450,000)
3. Add future expenses: University costs, weddings, funeral (e.g. £50,000)
4. Subtract existing assets: Savings, investments, existing life insurance (e.g. -£30,000)
5. Total coverage needed: Add steps 1-3, subtract step 4 (Example: £735,000 total)

Common coverage amounts by situation:

• Young couple with small mortgage, no children: £100,000-£150,000
• Family with young children, £200k mortgage: £300,000-£400,000
• Main earner with 2+ children, £300k+ mortgage: £500,000-£750,000
• High earner or business owner: £1 million+
• Over 50s, mortgage paid off: £50,000-£100,000 (funeral and inheritance)

Remember: it's better to have too much cover than too little. The difference in premium between £200,000 and £300,000 might only be £5-£10 per month.

How much does life insurance cost?

Life insurance premiums depend on several factors:

• Your age (younger = cheaper)
• Your health and medical history
• Whether you smoke (smokers pay 2-3x more)
• Coverage amount (more cover = higher cost)
• Policy length (longer terms = higher cost)
• Type of policy and its cover structure
• Your occupation (high-risk jobs cost more)

Example monthly premiums for £200,000 level term life insurance over 25 years (non-smoker, good health):

Life Insurance Costs by Age (£200,000, 25-year term, non-smoker)

Ways to reduce your life insurance costs:

• Buy cover when you're younger (premiums locked in for policy term)
• Stop smoking (can halve your premiums)
• Choose decreasing term instead of level term if covering a repayment mortgage
• Maintain a healthy BMI and lifestyle
• Choose a shorter policy term if appropriate
• Pay annually instead of monthly (save 5-10%)
• Consider increasing deductible for whole of life policies

How to choose the right life insurance

Follow these steps to find the best life insurance policy for your circumstances:

1. Determine how much cover you need: Use the calculation method above or aim for 10-15x your annual income
2. Decide on policy term: How long do you need protection? Until mortgage is paid? Until children are independent? Until retirement?
3. Choose the right type: Level term for general protection, decreasing term for mortgages, FIB for regular income, whole-of-life for intended lifetime cover
4. Compare quotes from multiple insurers: Compare the personalised premium alongside the cover, exclusions and policy terms
5. Consider additional features: Critical illness cover, terminal illness benefit, premium waiver, indexation options
6. Be honest in your application: Disclose all medical conditions and lifestyle factors - non-disclosure can invalidate your policy
7. Write your policy in trust: Ensures payout goes to beneficiaries quickly and may avoid inheritance tax

Important considerations when comparing policies:

Our comparison service has no broker fee and no obligation to buy. Get quotes from a wide range of UK insurers and speak to a UK-based adviser who can explain your options. Insurers pay commission if a policy starts.