What is life insurance and how does it work?

Home Guides Money Guides What is life insurance and how does it work?

Michelle Monck

Consumer Finance Expert

Published: 16/11/2020

At a glance

Life insurance is there to provide a cash payout to your loved ones in the event of your death, helping them cover things like funeral costs, debt payments and household bills.
The amount you’ll have to pay for your premiums can depend on things like your lifestyle and medical history – typically, the younger and healthier you are, the cheaper your premiums will be.
You can get life insurance as an individual, but joint life insurance policies are also available.

What is life insurance?

Life insurance is a product designed to protect your loved ones’ finances should you pass away (or be diagnosed with a terminal illness) during the term of the policy. It’s there to ensure that an already difficult time needn’t be made more so with the added financial burden that could ensue from a loss of income, and it needn’t cost that much to arrange this kind of cover. Read on to find out more about life insurance, how it works, and how you can find a policy that’s right for you.

How does life insurance work?

In a nutshell, you have to pay a premium (usually monthly) to the insurance provider for the duration of your policy, and on your death your beneficiaries will receive a payout (provided you die within the specified term, in the case of term assurance policies; see below).

The amount of cover you’ll receive, and the premiums you’ll have to pay, will depend entirely on your individual circumstances and the kind of policy you choose. Your life insurance quote will take into account your medical history, age and lifestyle factors, and typically speaking, the younger and healthier you are, the cheaper your quote will be.

Featured life insurance providers

Provider	Key features	Find out more
Aviva Life Insurance	With 98.6% of claims paid, you can count on Aviva Choose how long you’d like your cover to last, anywhere from 1 to 50 years Most customers get a quote and decision in just over 5 minutes Cover pays out a cash lump sum if you pass away or are diagnosed with a terminal illness where you’re not expected to live longer than 12 months. House purchase cover - If you’re taking out life insurance to coincide with the purchase of a new house, we’ll give you up to 90 days free life insurance. The free cover begins when we’ve accepted your application and you’ve exchanged contracts/completed missives, as long as you’ve given us a future start date that coincides with the completion of your house purchase. Terms apply. See policy summary for full details	Find out more
Post Office Life Insurance	You can pay from just £7 per month for our life insurance or pay more and get up to £500,000 of cover Choose Level, Decreasing or Increasing cover to suit your lifestyle and budget We include Terminal Illness Cover at no additional cost and pay out early if you're diagnosed with a terminal illness that meets our definition Pay more each month to add Critical Illness Cover to your policy	Find out more
QuotesForLife Life Insurance	We help you find the top life insurance quotes £100k life cover from just £5 per month* Unbiased guidance from FCA authorised advisors We help you compare quotes and save time and money Free, no obligation personalised quotes in a matter of minutes	Find out more
Caspian Life Insurance	Save Time & Money - With a helping hand along the way Expertise - Extensive - industry knowledge means the best policy options can be provided Exclusive Broker Benefits - The hard work is taken out of the underwriting process UK Based Advisors - A team of experienced advisors Tailored Policy - Can put together a custom-made policy Free Trust Service - By writing a policy in trust, the proceeds can be paid directly to loved ones.	Find out more
The Insurance Surgery	Leading life insurance Pre-existing health conditions including: Diabetes, Heart conditions, Kidney disease, MS, Cancer, Stroke, Mental Health, Neurological conditions. Critical life cover Home Protection Income protection Business protection Travel Insurance Cover for dangerous occupations including Armed Forces and Fire Service Insurance cover for extreme sports including Motor Sports, Winter Sports and Sailing	Find out more
Life Insurance Quote Compare	Exclusive deals through select UK insurers Include Public Liability in one policy Only pay for the cover needed You fill in one form, We do the rest Completely Free, No Obligation Service Save Time and Money Plans from just £2 per week	Find out more

Note

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Disclaimer

The list of life insurance providers on this page is a selection of services available and gives you an idea of the kind of options available. You can find out more about the individual products by visiting any of the providers listed. All information is subject to change without notice. Please check all terms before making any decisions. This information is intended solely to provide guidance and is not financial advice. Moneyfacts.co.uk will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts.co.uk recommends you obtain independent financial advice.

What are the three main types of life insurance?

There are three main types of life insurance to consider, each with slightly different features: term assurance, whole of life, and family income benefit policies. Let’s take a look at each in turn.

Term assurance policies

Term life insurance is the most basic type of cover. It lets you specify how much cover you want and how long you want to be covered for – if you die within that term, the policy will pay out, but if you don’t, the policy will come to and end and you won’t get your premiums back. Within this broad kind of cover, there are three different types: level term (which pays out a lump sum when you die, with the amount you’re covered for remaining the same throughout the term), decreasing term (wherein the payout decreases over the term of the policy, making it particularly suitable for a capital and interest repayment mortgage), and increasing term (the amount of cover increases over the term, usually in line with inflation). In many cases, a combination of cover options may be the most suitable.

Whole of life policies

These policies are exactly as they sound – policies that provide cover for your whole life and that pay out on your death, no matter when that may be. Because of this guaranteed payout, whole of life policies are more expensive than term assurance policies, which only have to pay out if you die during a certain time period.

Family income benefit policies

This is a type of decreasing term life insurance that pays out a regular monthly income to your beneficiaries, rather than a lump sum. The payments continue until the policy’s expiry date, provided you die within the term.

Which providers offer life insurance?

There are a whole range of providers offering life insurance these days, from high street banks (such as HSBC Life Insurance) to well-known insurers (Aviva Life Insurance and Legal and General Life Insurance, to name but two) and even more niche providers. All will offer different levels of cover and prices accordingly, so as with anything, make sure to compare quotes to find the best life insurance policy for your needs.

Should I get a single or joint life insurance policy?

In any of the above broad categories, there are also joint and single life policies to choose from, a decision that any couple will need to carefully consider. Single life policies cover one person only, with any payout going to the estate. Joint policies, however, cover both parties, and will either pay out on the death of the first partner (first-death policies, which are typically used to provide a lump sum to cover the mortgage) or the second (second-death policies, which can be used to cover an inheritance tax bill). First-death policies are usually more common, however, and can mean that the surviving partner is left without insurance (unless they take out a new policy, which could be more expensive as they’ll likely be a lot older than when they first arranged cover).

This is just one reason why many people opt for two single-life policies, rather than a joint one, as this can often provide far better value. Not only that, but single life policies offer more flexibility with any payout distributed to the estate under the terms of the will, rather than going directly to the surviving spouse. Then there’s the fact that if both partners die within the policy term, there’ll be two payouts to loved ones. Premiums need not be any more expensive than having a joint-life policy, either, so it could be worth considering.

Why might life insurance not pay out?

The most common reason for a life insurance policy not paying out is non-disclosure – i.e. you weren’t completely honest when taking out the policy. This is typically related to undisclosed pre-existing medical conditions (such as you had cancer but didn’t tell the provider) or lifestyle choices, such as substance misuse or smoking.

If you missed a premium payment, your policy may also expire and therefore not pay out on death, and some policies have a “waiting period” – typically seen in over-50s life insurance – whereby if you die within the first 12-24 months, the policy won’t pay (though your premiums will be refunded). Likewise, if there are certain exclusions listed in your policy, then it won’t pay out, and if you’ve got a term assurance policy that expires, your death after this time won’t result in a payment.

That said, life insurance providers aren’t looking for reasons not to pay – and in fact, over 99% of all claims are paid.

Do I really need life insurance?

While it isn’t a legal requirement to have a life insurance policy – though it’s likely that a mortgage provider will recommend you have one before they’ll grant you the loan (see more below) – it’s often recommended to invest in a suitable policy, for the simple reason that you’ll have peace of mind that your loved ones’ finances will be protected after your death.

However, if you’re a mortgage-holder, it’s even more important to have a policy in place. A mortgage will probably be the biggest financial commitment you ever make, with it not uncommon to owe hundreds of thousands of pounds to your lender. Could your family afford to cover that kind of sum if they didn’t have your income? If not, life insurance is essential, as if they couldn’t keep up with the repayments, there’s the chance they’d have to sell the property to repay the debt. Having life insurance for a mortgage prevents this from happening. You can find out more about this kind of policy in our guide 'Do you need life insurance to get a mortgage?'.

That said, if you don’t have a partner, children or any dependents – or if their income wouldn’t be impacted should you die – it may not be worth getting cover. It’s all about your individual circumstances.

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Life insurance FAQs

What does life insurance cover?

At its simplest, life insurance covers your life – and will give a cash payout to those who might financially suffer as a result of your death. It covers you if you die or are diagnosed with a terminal illness within the policy term, provided you fully disclose all conditions when you arrange your policy.

What is not covered by life insurance?

Any conditions listed on the exclusion list, which will typically depend on your own medical history and pre-existing conditions. If you die as a result of one of these conditions, the insurer doesn’t have to pay out. Other common exclusions include death related to alcohol or substance abuse, or as a result of a dangerous sport.

How much life insurance do I need?

It’s a personal decision – and one that often depends on the type of policy you opt for – but as a general rule, it’s recommended to have a policy that will cover 10 times the income of the highest earner, at least until any children have left full-time education. If you’re simply opting for a decreasing term policy to repay a mortgage, the decision will be based on the mortgage value and the remaining term of that loan.

How much does life insurance cost per month on average?

This all depends on your individual circumstances. If you’re young and healthy, you’ll typically pay far less than someone who’s older with pre-existing conditions, but as with anything, it’s important to do your research and compare quotes to find the one that’s right for you.

Do I need life insurance for a mortgage?

As discussed above, this is one of the few reasons where you really should consider investing in life insurance, if only to provide reassurance for your loved ones that they won’t lose their home after your death.

Can you have more than one life insurance policy?

Yes, in theory. There’s nothing to stop you from having several different life insurance policies should you wish – and some couples find they have both a joint and single life policy – but it may be prudent to amend the terms of your current policy, rather than taking out new cover. The exception to this could be if you need more specialist cover (such as if you’re starting a business), but it’s always worth discussing the options with your provider and/or a broker to find the deal that’s right for you.

What is the best age for life insurance?

Looking purely at cost, the best age to get a life insurance policy would arguably be when you’re younger, as premiums will typically be cheaper (though you’ll likely need to pay them for longer, particularly if you’ve got a whole of life policy). That said, if you don’t purchase a property or have financial dependents like children until later life, you probably won’t need to worry about a policy until that time, just bear in mind that premiums are usually more expensive the older you get.

Which is better – term or whole of life policies?

It depends on why you need the insurance cover. Some would argue that a whole of life policy is better as it guarantees a payout, but premiums will be higher. A term life assurance policy could therefore be better suited to those with a specific need to cover a debt, or those on a budget, or with health conditions that could impact their life expectancy.

Can I still get a policy if I’m older or have pre-existing conditions?

Typically speaking, yes, although it may cost more as a result. There are even specific products designed for over-50s life insurance that can be considered for those in this age group, many of which guarantee acceptance, though it’s still worth doing your research to find the best deal.

What happens to life insurance if you don’t die?

If you’ve got a term assurance policy and you don’t die within the set term, the cover will come to an end and you won’t get your premiums back. However, if you’ve got a whole of life policy, the cover will continue until your death.

Finding the best life insurance policy for you

You may be wondering which is the best life insurance policy. Well, that’s a very personal decision, and one that entirely depends on your individual circumstances. This is why it’s vital to do your research before you make your decision. Shopping around is essential, and if you can, seeking specialist support from a financial adviser or broker would be ideal. Start the process by comparing policies to find the best life insurance quote for you.

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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What is life insurance and how does it work?

Michelle Monck