How does life insurance work in the UK?

Fill in the form below for a FREE, no obligation quote NOW!

As your responsibilities grow, it’s natural to start thinking about life insurance cover to protect your family and loved ones should something happen to you. There are numerous types of life insurance policies in the UK, and choosing the right one can seem like a daunting task. Each life insurance policy offers its own set of benefits and suits different needs. Before choosing a policy, it’s essential to understand life insurance costs, which one is right for you, and how much cover you need.

What is life insurance?

Life cover is a type of policy that provides a payout when you pass away during a predetermined period. How much your loved ones are paid will depend on the life insurance policy you choose and the term duration. Payout also depends on the cause of death, whether you notified the insurance company of pre-existing health conditions and when you pass away during the life cover term.

What are the different types of life insurance policies?

  • Icon For CPU#1

    Life insurance calculator

    Estimate the size of life insurance cover you might need based existing and future obligations.
  • Your total life cover estimate
    £100,000
    Let us help you find your best quotes

Before choosing life insurance cover, it’s essential to understand the different types of life policies and how they can benefit you. Here, we’ll cover the primary types of life cover – whole of life, term life, and over 50s cover.

Whole of Life

A whole of life insurance policy provides you with cover for the rest of your life. Regardless of when you pass away, your family and loved ones will receive a lump sum payment. This type of product isn’t offered by all life insurance providers, and since payment is guaranteed, it’s always more expensive than other types of life policies. As a result, this policy is popular with people looking to leave cash to help loved ones cover inheritance tax, which is currently set at 40% on anything over £325,000.

Term Life Policy

Unlike whole of life, term life policies only payout if you pass away during a predetermined period agreed on between you and the insurance company. Term life insurance policies can be further divided into level term and decreasing term insurance.

Level term life insurance

A level term policy ensures that the payout amount of your policy stays the same throughout the insurance cover period. For example, if your policy provides you with £60,000 of cover over a period of 25 years, your beneficiaries will receive £60,000 regardless of when you pass away in those 25 years. This insurance product is popular with people with an interest-only mortgage since the amount to be paid stays the same.

Decreasing term life insurance

On the other hand, there are decreasing term policies. The payout of this product reduces throughout the insurance period, but so does the monthly premium. It’s an affordable option usually used by people with a repayment mortgage. Since the mortgage cost reduces over time, there is no need to pay for more insurance than you need.

Over 50s life insurance

This is a popular product offered by most insurance companies in the UK. As the name suggests, you have to be 50 years old or over to buy this type of policy. Cover is for the rest of your life and is usually used to cover funeral costs. The payout amount is also much lower than standard whole of life policies.

Life insurance add-ons and options

Once you have selected the type of life insurance policy you want, you can choose a series of add-ons to tailor the policy to your specific requirements. Here are some of the most common options:

Critical illness cover

An insurance provider will always allow you to add critical illness cover for an extra monthly premium. Typically, it ensures that you receive a lump sum if you are diagnosed with a severe or long-term illness. The diseases covered will depend on the insurance provider, so always check before opting for this add on.

Family income benefit

If you’d like your loved ones to receive regular payments instead of one large payment if you pass away, you can opt for a family income benefit. It helps your family manage finances better and can ensure that your children are financially protected until they are independent.

Waiver of premium

Waiver of premium covers your life insurance premiums if you fall ill and cannot work. Many insurance providers will cancel your policy if you miss a payment; therefore, having a waiver of premium is excellent financial protection if you feel that you wouldn’t be able to pay for your insurance if you stopped receiving income from your job.

Terminal illness cover

Most life insurance policies will include terminal illness with your standard policy. This add-on pays you a lump sum if you are diagnosed with a terminal illness and given less than a year to live. The payout can help cover medical costs or other expenses related to your illness.

How much life insurance do I need?

We compare plans from the leading life insurance providers

The amount of cover you need will depend on your situation and why you need life insurance in the first place. The best way to ensure that you are getting enough coverage and not paying for more than you need is to use a life insurance calculator. It’s a helpful tool that allows you to input what you need covering and generates an estimated figure. Once you know more or less how much cover you need, you should get financial advice or discuss your options with an insurance provider.

If you’d like your life policy to cover the cost of your mortgage, you simply set the cover amount to the total mortgage cost. If you’d like your family to be financially protected, you can calculate family expenses and your children’s living costs until they are likely to be financially independent.

How do I choose a life insurance policy type?

Like the coverage amount, the type of policy you should choose will depend on your requirements. If you’re over 50 and would like to help cover the cost of your funeral, you should opt for an over 50s policy. On the other hand, if you’d like to leave your loved ones an inheritance or help pay tax, you can take out a whole of life policy. You could also opt for a term life product if you only need cover for a certain period, such as the duration of a mortgage contract or when your children are still financially dependent on you.

The best way to ensure that you have the right policy is to get financial advice from a qualified professional or talk to an insurance company or insurance broker.

Whose life do you cover?

Typically, when you take out a life insurance policy, you only get cover for yourself. However, you can opt for a joint life insurance policy to cover you and a partner. This can be a spouse or a business partner. This is a great way to reduce life insurance costs and save money since you’ll pay a higher premium, but you won’t have to take out two individual policies. In some cases, life insurance policies also cover your children up to a certain age. This is most common with life policies provided by employers. If you already have a policy, you should check your existing life insurance to see if your children are covered.

Do you need life insurance?

Whether you need to buy life insurance or not will depend on your circumstances. In most cases, life insurance is a fantastic way to ensure that your family and loved ones can receive financial support if you pass away. If you didn’t have protection, could your family continue living the same lifestyle once you’re gone? Or could they afford to cover mortgage payments and household bills?

There are plenty of reasons that make life insurance work for you. If you have a large estate that surpasses the UK inheritance tax threshold, you could be making your family’s life easier by leaving a cash lump sum to cover the tax cost. As previously mentioned, if you’re still on the fence, get in touch with an advisor to discuss your options and the best course of action.

How much is life insurance?

The cost of life insurance will depend on various factors. To begin with, life insurance premiums are affected by what type of policy you choose, since whole life insurance is more expensive than term life. Companies will then take into account your personal details, such as age, occupation, health, medical history, and smoking status.

As a result, life insurance quotes will vary on a case by case basis. We’ve put together some example quotes below to give you a better idea of the costs involved. Note that this does not take into account any add-ons, such as critical illness.

  • A 40-year old non-smoking applicant looking for £200,000 cover on a level term policy over 25 years will pay a monthly premium of around £16.
  • The same applicant would pay a monthly premium of around £11 for a decreasing term policy over 25 years.

How to lower your life insurance monthly premiums

If you feel like your life insurance premium is too high, there are specific steps you can take to help lower costs. To begin with, you should try to work on factors you have control over, such as health and smoking. The latter is one of the worst contributing factors to life insurance costs, and quitting will reduce your premium massively. You should also consider weight loss and taking part in less dangerous activities.

Another fantastic way to get a better premium is to shop around. The first quote you are given isn’t always the best. Insurance companies can be flexible with their prices, so it’s worth looking around for the right deal. You should also use a price comparison website, which will showcase the best rates on the market at the time of application.

Can I take out a life insurance policy with a pre-existing medical condition?

Most insurance companies in the UK offer life products to applicants with pre-existing conditions. However, since there’s already a risk that could affect your life expectancy, your premium cost will be much higher. It’s essential that you notify the provider of your medical history and any other conditions, including mental health illnesses. If you fail to disclose a condition and the insurance company finds out, your loved ones could be denied a claim or your policy could be cancelled.

An excellent way to get a better deal with pre-existing conditions is to go with a company that specialises in providing life insurance to clients in your situation. They are usually better equipped to handle such cases and won’t charge as much compared with traditional insurance companies.

Can I take out a life insurance policy without a medical?

There are many reasons why you might want to keep your medical history private. Almost all companies will ask you questions regarding your health, such as if you’ve ever had certain types of diseases, if you smoke, or how much alcohol you consume. The exception to this rule is over 50s life insurance policies, which usually offer guaranteed approval and no medical questions asked.

A company might ask for a medical if they need to assess your health condition in more detail or if you are opting for a short term insurance policy. However, insurance companies don’t usually request physical medical examinations.

What is the average life insurance payout in the UK?

The average life insurance payout depends on the type of policy. In 2020, the average critical illness cover paid to beneficiaries totalled £67,011. For whole life policies that figure totalled £4,026, whilst for standard life policies it reached £79,304. In addition, the average claim on income protection policies totalled £22,170.

If you’re worried about whether a company will approve a claim on your policy, check their payout rating and how many claims they approved the previous year.

How long do you have to pay life insurance before it pays out?

Typically, for whole life and term policies, you’ll need to pay every monthly premium until you pass away to get a payout. If you miss a payment, the insurance company might cancel your policy and ask you to take out a new contract. If you’re worried that you might miss a payment, you can opt for an income protection add-on which ensures that payments are made if you fall ill and cannot work.

When would life insurance not payout?

There are various reasons why insurance providers won’t approve a claim. Some companies have their own rules, so ensure that you go over those in detail before buying life insurance. Here are some of the most common reasons for declined claims:

  • The applicant lied in the application. This can be a failure to disclose pre-existing conditions or medical history truthfully.
  • The policyholder commits suicide in the first 12 to 24 months of the policy. Most companies have a protection clause against this.
  • Missed monthly payments. Most companies will cancel your policy if you don’t pay your premiums.
  • The insurance provider does not cover the cause of death. This is sometimes the case when policyholders pass away in a country that isn’t included in the policy or whilst doing a dangerous activity.

To ensure that your loved ones can submit a successful claim, you should always thoroughly go through the insurance policy details. If you’re still unsure, employ the help of an adviser to go through the contract with you so that you know exactly what you’re signing up for.

Can I write life insurance in trust?

One of the best ways to ensure that your life insurance payout is paid precisely how you want is to write your policy in trust. This means that a trustee will manage your policy during the payout period. Here’s how it can benefit you:

  • You can leave money to specific beneficiaries. Without a trust, your payout could be used to pay off debts instead.
  • Your beneficiaries will have quicker access to funds. This is because there is no probate period, which can sometimes take months to complete. Through a trust, your loved ones can receive the money within days.
  • Avoid paying inheritance tax. If your policy isn’t in a trust, the payout from your life insurance will be considered part of your estate.

If you plan to write your life insurance in trust, you should consider going with a provider that also offers a write-in trust service. This will keep everything under one provider and help reduce costs.

Can I get short term insurance?

There are various situations where you might need to get life insurance on a short term basis. The most common reasons for taking out this type of policy include:

  • To have life cover whilst waiting for a main policy to be approved. When changing jobs, it’s common to have a gap in which you are not covered. This is usually the case for employees that receive their life policy through work.
  • You’re set to visit a dangerous country or location that your life insurance company doesn’t cover. Many firms have a list of world locations that aren’t covered by their policies.
  • You’re planning to participate in a hazardous activity, such as motor racing or skydiving. In this situation, many companies won’t cover the cause of death, so it’s worth getting short term insurance as an extra layer of protection.

You should note that short term insurance is typically more expensive than standard policies. This is because there’s usually an added risk to providing you with life cover.

How to make a life insurance claim

The advisors and agents who work at insurance companies are usually trained to deal with these situations and ensure that the claims process is as easy as possible. To begin with, your beneficiaries should notify the insurance company to make a claim.

They’ll need to provide your information and cause of death. They’ll then need to submit certificates that prove the information they provided, including a death certificate, a policy certificate, and a claims form. Companies will usually go through an investigation period, after which they will pay out the claim if no issues are identified.

Life insurance guides