What is life insurance and how does it work?
Life insurance is a type of insurance policy that will pay out a lump sum of money or an income to your family or other dependants if you die within the ‘term’ of the policy. Having life insurance will ensure your intended beneficiaries are provided for should you die prematurely, and the cash sum can be put towards paying the mortgage, household bills or other day-to-day living expenses.
If you outlive your life insurance policy, the policy will simply expire. This means you won’t receive a payout and you won’t get back any of the money you’ve spent on premiums. Should you decide to take out another policy, bear in mind that premiums are based on your age at the time of your application and so if you apply when you are older, the policy is likely to be more expensive.
Types of life insurance
There are a number of different types of life insurance to consider when comparing your cover options and these include:
- Over 50s life cover - as the name suggests, this type of cover is for those over the age of 50 and is typically bought to cover funeral expenses. Acceptance is guaranteed so you won’t have to answer any health questions or pass a medical test. They don't offer great value for money if you're healthy as you can usually find cheaper products by going through a health questionnaire.
- Whole of life - has no end date so it will pay out whenever you die. There is often an investment element to this type of policy and the premiums can rise steeply in older age.
- Single/Joint cover - a single life insurance policy will provide cover for one individual, while a joint policy will provide cover for two individuals. Joint cover is often cheaper than two single policies (although not always), but it will only pay out once (on the first or second death).
- Level term cover - the amount of life insurance cover remains level throughout the term of the policy and premiums are fixed. This type of cover can be useful for paying off an interest-only mortgage in the event of death or simply to provide a guaranteed lump sum.
- Decreasing term cover - also known as mortgage protection insurance, the level of life insurance reduces over the term of the policy. It is a good option for covering the outstanding debt on a repayment mortgage.
- Increasing term cover - also known as index-linked term insurance, both the amount of cover and your premiums increase annually over the term of the policy to keep cover in line with inflation.
- Family income benefit - rather than paying out a lump sum upon death, it pays out a regular income stream instead.
- Life insurance with critical illness - some policies allow you to combine life insurance with critical illness cover. Critical illness cover will pay out a lump sum if you are diagnosed with a specific illness listed on the policy. However, combined policies only pay out once, so if you make a successful claim for critical illness, you will lose your life insurance benefit.
What is covered under a life insurance policy?
Life insurance will pay out a lump sum to your family and dependents when you die. Some policies will also automatically include terminal illness cover which pays out if you are diagnosed with an illness that is likely to cause death in the next six or 12 months.
Once your application has been underwritten by the insurance company you will be covered for death in any event. However, most policies will not pay out for death caused by suicide in the first 12 months. It is worth noting that the most common reason for a declined life insurance claim is non-disclosure, so make sure you note everything down on the application when you apply.
Do I need life insurance?
Life insurance should be considered if you have children or other dependants as it can provide a valuable financial safety net and ensure your family could cope if you were no longer around. Life insurance can also be beneficial if you have a mortgage as it can pay off the mortgage debt in the event of premature death.
To work out how much cover you need it is best to consider how much you would need to pay off your outstanding mortgage and other debts such as loans and credit cards. You may also want to factor in costs such as childcare fees and education expenses, and whether there will be a potential Inheritance Tax (IHT) bill payable on your estate. However, keep in mind that the more cover you have, the more expensive your premiums will be, so it’s important to find the right balance and make sure premiums are still affordable. You can find out more in our article ‘How much life insurance do you need?’
Pros and cons of life insurance
- Life insurance can provide financial security and ensure your intended beneficiaries will be looked after if you die prematurely.
- Your dependants can use the payout however they like - to help pay bills, everyday living expenses, or funeral costs, for example.
- Life insurance premiums can start from as little as £5 a month.
- If you outlive your policy you won’t receive a payout or get a refund on premiums paid.
- Premiums get more expensive the older you are when you apply, so it is often better to take out a policy while you are young.
What’s the average cost of life insurance?
How much you pay for life insurance cover will depend on several factors including your age, whether you smoke, your health and lifestyle, your occupation and the amount of cover you choose.
Monthly premium for £100,000 of level life insurance over 20 years
|Age||Monthly premium for a non-smoker||Monthly premium for a smoker|
Top 10 life insurance providers in the UK
|Provider||Maximum insured amount||Minimum and maximum term (years)||Minimum and maximum age||Claims history|
|Aegon||Unlimited||1 - 50||18 - 83||96% (2020)|
|AIG||Unlimited||2 - 70||17 - 86||99% (2018)|
|Aviva||Unlimited (term cover)||1 - 50||18 - 89||99.3% (2020)|
|Beagle Street||£750,000||5 - 40||18 - 64||99.5% (2019)|
|L&G||Unlimited||1 - 50||18 - 77||97% (2020)|
|LV=||Unlimited||5 - 45||17 - 84||99% (2020)|
|Royal London||Unlimited||5 - 50||18 - 70||95.7% (2020)|
|Scottish Widows||£25,000,000||Minimum 1 year||18 - 79||99% (2020)|
|Vitality||£20,000,000||5 - 70||17 - 75||99.6% (2020)|
|Zurich||Unlimited||1 - 50||16 - 83||98% (2020)|
Top 10 life insurance policies in the UK - Insurer summary
Aegon - Life insurance policy summary
- Aegon started life as Scottish Equitable in 1831 and offers a range of insurance and pension products.
- Types of life cover include term life insurance, whole of life, family income benefit, and life with critical illness cover.
- The maximum term is the shorter of 50 years or the number of years from the benefit start date to the date before the policyholder's 90th birthday.
- Policyholders can access a health and wellbeing service with counselling and legal support, as well as a second medical opinion service offering face-to-face consultations.
- Aegon will pay the funeral director or funeral home an advance claim payment of up to £10,000 on valid life protection claims, where probate causes a delay.
AIG - Life insurance policy summary
- AIG is a global insurance company that operates in more than 80 countries and jurisdictions.
- Types of life cover include term insurance, whole of life and family income benefit, plus life and critical illness cover.
- It also offers Life Start where premiums start low and increase over time and Instant Life Insurance which offers cover more quickly.
- AIG also offers a unique critical illness insurance called Key 3 that covers you for the 3 most claimed upon illnesses only - cancer, heart attack and stroke.
- The maximum term is 70 years, although cover must end before the policyholder’s 90th birthday.
- Policyholders have access to Smart Health which provides on-demand consultations with GPs, as well as mental health support, an online health check and a fitness programme.
Aviva - Life insurance policy summary
- Aviva has more than 15 million UK customers and provides a range of insurance products.
- Types of life cover include term insurance (level and decreasing), whole of life and family income benefit, plus life and critical illness cover.
- The maximum term is 50 years, subject to the oldest policyholder being 90 years of age or less at the end of the policy.
- House purchase cover is included and provides up to 90 days’ free life insurance if you’re taking out cover to coincide with a house purchase.
Beagle Street - Life insurance policy summary
- Beagle Street is backed by Scottish Friendly Assurance Society and offers life insurance and critical illness cover.
- Types of life cover include level and decreasing term cover.
- The maximum insured amount is based on age. Up until the age of 40 it is £750,000 and it then decreases.
- The maximum term is 40 years, or up until the age of 79.
- If your family makes a valid life insurance claim, Beagle Street will pay up to £5,000 of the claim value to help with funeral costs.
- A counselling support service and a will writing service is also available.
L&G - Life insurance policy summary
- L&G was founded in 1836 and offers insurance and investment products.
- Types of life cover include level, decreasing and increasing term cover, whole of life cover, family income benefit and over 50s cover. Critical illness cover can be added.
- The maximum term is 50 years, although cover must end before the policyholder’s 90th birthday.
- Nurse support services are automatically included, offering a second medical opinion service and mental health support.
- Free life cover is also included if the policyholder dies before completion on a property purchase and before their mortgage protection starts.
LV= - Life insurance policy summary
- LV= has 1.28 million customers and provides a range of products such as life insurance and critical illness cover.
- Types of life cover include level and decreasing term cover or inflation-linked cover. Critical illness cover can be added.
- The maximum term is 45 years, although cover must end before the policyholder’s 85th birthday (or 70th for inflation-linked cover).
- Policyholders have free access to LV= Doctor Services.
Royal London - Life insurance policy summary
- Royal London was founded in 1861 and provides a range of protection policies and pensions.
- Types of life cover include level cover, decreasing cover or family income benefit. You can also choose over 50s life cover.
- The maximum cover amount is £500,000.
- The maximum term is 50 years, but cover must end by the age of 80.
- Serious Illness Benefit can be added.
Scottish Widows - Life insurance policy summary
- Scottish Widows was established in 1815. It became part of the Lloyds Banking Group in 2009.
- Types of life cover include level, decreasing and increasing cover. Critical illness cover can be added.
- The maximum cover amount is £25,000,000 for level and decreasing cover.
- The minimum term is one year for level and increasing cover and three years for decreasing cover. Cover must end before the policyholder’s 90th birthday.
- Scottish Widows Care provides advice and emotional support to policyholders and their families.
Vitality - Life insurance policy summary
- Vitality is owned by global insurance firm, Discovery Holdings, and offers a range of insurance products. It also offers Vitality Rewards - Check out our independent Vitality review for more information.
- Types of life cover include term insurance (level, decreasing and indexed) and whole of life cover. Serious Illness Cover can be added.
- The maximum cover amount is £20,000,000 (level cover).
- The maximum term is 70 years, up to the age of 90.
- Get a premium discount of up to 60% on whole of life cover and 40% on fixed term cover if you take out Vitality’s Wellness Optimiser which gives you access to a range of discounts and rewards partners (for a monthly fee).
Zurich - Life insurance policy summary
- Zurich is a Swiss insurance company offering a range of savings, investments and insurance products.
- Types of life cover include level, increasing or decreasing cover. Critical illness cover can be added.
- The maximum term is 50 years, although cover must end before the policyholder’s 90th birthday.
- Policyholders have access to the Zurich Support Service which offers short-term counselling and professional consultation.
Which life insurance provider offers the cheapest premiums?
The amount you pay for life insurance will depend on a number of factors including your age, your health, whether you smoke, your occupation (some occupations are seen as higher risk, resulting in higher premiums), how much cover you choose and the length of the term.
Because monthly premiums are unique to each person, it is impossible to say which life insurance provider is best for you. The right cover will depend on your circumstances and the type of policy you want. Each insurance provider will underwrite your application differently and will set your monthly premium in accordance with their internal risk management rules. This means that the premium you see on a price comparison website is unlikely to be what you end up paying. It is therefore a good idea to speak to an independent insurance specialist before buying cover.
Both those who are employed and those who are self-employed can benefit from taking out life insurance as it will ensure your intended beneficiaries are financially secure if you’re no longer around. It is worth noting that some employers provide a ‘death-in-service benefit’ which pays out a lump sum if you die while in employment - typically around four times your annual salary. But while this can be beneficial, you may want to consider taking out additional cover depending on how much you owe on your mortgage and how much cover your dependants would need. It can also be worth having extra cover in the event you leave the company.
Businesses can also take out what’s known as keyman insurance which protects a business against the loss of an important staff member (defined as someone who is crucial to the company’s financial success). The payout can then be used to cover the costs of finding a replacement or in place of lost profits. Shareholder protection insurance and relevant life insurance policies are also worth considering - you can read more about the different policy options for businesses in our article ‘What is the difference between shareholder protection, keyman and relevant life insurance?’
Best and cheapest way to buy life insurance
If you are thinking of applying for life insurance, it is best to speak to an independent specialist first. An independent specialist will be able to advise you on the best policy for your circumstances, as well as how much cover you need, ensuring you get the correct level of protection at the right price.
Independent specialists can match you with the insurance company who will view your application most favourably and help you complete your application forms. They can also help you put your policy into trust (meaning the policy would pay out quickly and your beneficiaries would not have to pay inheritance tax) and provide additional support should you need to make a claim in the future. Simply click on this link and fill in the short form to get a quote, with no obligation to take things further. You'll also qualify for £50 cashback if you decide to take out a policy with them.
Alternatives to life insurance
There are a few alternatives to life insurance as we highlight below:
- Critical illness - pays out a tax-free lump sum if you are diagnosed with a specific illness or medical condition listed on the policy. The payout can be used to help pay for bills and debts, as well as any alterations to your home if you are disabled.
- Income protection - pays out a monthly benefit if you are unable to work due to an accident or illness. Policies will typically pay out until you retire, die, or go back to work, but short-term policies are also available. Payouts are tax-free but usually only around 60% to 70% of your salary.