Life insurance advice guide

In this article, we explain how life insurance works and whether you need advice including some useful life insurance tips that will guide you to the right type of life insurance for your needs. If, after reading this article, you need further help, we explain the best way to get free life insurance advice as well as how to get up to £100 cashback* when you buy an insurance policy.

Do you need life insurance?

If the people in your life require access to money to pay for things this will become difficult if you die then it is likely that you need life insurance. Life insurance can prevent financial hardship for the people you leave behind and provide you with peace of mind that those who depend on you will be looked after and your financial obligations will be met.

The main reasons why people need life insurance

• Children/Dependents - money needed to pay for everyday and occasional costs involved with raising children and keeping households running
• Debts - money to clear or reduce outstanding debts including mortgages, loans and credit cards
• Funeral - money to pay for the immediate cremation/burial and wake costs
• Inheritance Tax - money that is paid outside your estate to your beneficiaries to pay for inheritance tax

It is quite normal to wonder, 'Is life insurance worth it?' but it is sometimes easier to think about life insurance in terms of what would happen if you did not have life insurance and died. Although there is little that you can do to prevent the emotional hardship caused by your death, there are ways to ensure that the financial loss is buffered by a life insurance payout. In 2022, nearly £4 Billion was paid out under life insurance contracts and the average life insurance payout in the UK was over £70,000 - source: www.abi.org.uk

Which life insurance is best for you?

The life insurance that is best for you will depend on your personal circumstances and needs. Different types of life insurance are designed to cover different needs so it is important to understand your needs first. Below we look at the most common reasons for taking out life cover and suggest which types of life insurance are relevant. You can click on the policy types to read more about each type of cover.

Life insurance for family or dependents

If you die, a family income benefit life insurance policy pays a regular income to your dependents for a period of time that you choose. Family income benefit policies are usually the most cost-effective and appropriate type of life insurance to take care of your family's day-to-day living costs. They are not commonly found on comparison sites but you can find family income benefit solutions through a life insurance broker.

You can supplement the regular income that your family will receive from the family income benefit policy with a level term assurance policy that will pay out a lump sum of money to your family that they can use for the immediate funeral costs and perhaps put away for larger costs and for a rainy day.

Life insurance for debts or a mortgage

Interest-only mortgages and loans are best covered by a level term life insurance policy where the level of cover remains the same throughout the term of the policy. You can include any personal loans, credit cards and other debts to the total amount of cover you need so that if you die, there is sufficient money to clear your debts.

A repayment mortgage can be covered using a decreasing term life insurance which is sometimes called mortgage protection life insurance. This type of life insurance policy reduces in value as the years pass so that it tracks the amount needed to pay the balance of the repayment mortgage as it steadily reduces. Although decreasing term life insurance can be a cheaper option, there's nothing to stop you from buying a level term life insurance so the amount paid if you die, doesn't reduce over time.

Life insurance to pay funeral costs

There are a number of life insurance companies that offer over 50s life insurance policies for people who just want to make sure that their funeral costs are covered when they die. These policies don't ask for your medical history and usually appeal to people over the age of 50 who have health conditions, as other types of life insurance may be too expensive or unavailable.

If you're in good health, you'll usually find better value life insurance in the form of a level term life insurance or whole of life insurance policy as these types of policies are likely to give you more cover for your money. With whole of life insurance, do check whether your monthly premium is guaranteed or reviewable as reviewable premiums can and usually do increase over the years and may become unaffordable to maintain.

Life insurance to pay an Inheritance Tax bill or to leave a gift

Whole of life insurance will cover your life until you die. You can buy this type of life insurance policy and write your life insurance into a trust which will allow you to nominate your beneficiaries. This ensures that the money goes to the right people and keeps the money outside your estate to avoid adding to any inheritance tax that might be due. Your beneficiaries can then use the money to pay any inheritance tax that is due on your estate.

If you don't put the whole life insurance policy into a trust and you die, the money will be paid into your estate and will inflate the estate's value which may increase the inheritance tax bill for your family. Again, check whether the monthly payments are guaranteed or reviewable - reviewable premiums can and usually do increase over time.

How much does life insurance cost?

The cost of life insurance is calculated using your age and whether you are a smoker or non-smoker and can start at as little as £3 per month. However, this price can, and often does, change once you answer questions about:

• Your health
• Your family's health
• Lifestyle and hobbies
• Occupational risks

A 30-year-old healthy person will pay around £8 per month for around £300,000 of life insurance while a 50-year-old person may pay around £40 per month for the same amount of life insurance.

The real price will be offered to you once you have completed an application form and once the underwriters (people who assess your application at the insurance company) have assessed this and made their decision. Once your life insurance application is assessed, you may or may not receive an offer of life cover with a higher premium.

It helps to speak to a specialist life insurance adviser* to discuss your health, lifestyle and occupation before selecting your insurance options. Specialists will know which life insurance companies will treat you the fairest in terms of price and cover. They'll be able to give you a good indication of what your life insurance will cost before you complete the full application process. They'll also help you tailor your life insurance to suit your budget to maximise your benefits and avoid paying higher premiums.

You can also read our article, "Best and cheapest life insurance in the UK" where we go into more detail.

Where can I buy life insurance?

There are a few different routes to buying life insurance and each can have its benefits as well as drawbacks. Here we look at the most common routes to buying life insurance and explain what you can expect. You can find more detailed information in our article, "Where can I buy life insurance?".

• Life insurance or Mortgage adviser - often referred to as brokers, these individuals can provide you with life insurance advice but they vary in quality so you should check whether they search the whole market for prices or are tied to a panel of insurers.
• Financial adviser - qualified and regulated individuals who can provide you with life insurance advice but may charge you for the service provided. Again, you should check how many insurance companies they have access to and whether they will write your life insurance in trust as part of the service.
• Life insurance comparison sites - online comparison sites are very generic and although they gather information about your needs, the solutions can be very simple and may even indicate a larger level of cover than you need. You will have to search for different types of insurance separately as most online comparison sites do not package illness and life insurance needs together.
• Bank or Building Society - your bank or building society may offer life insurance that is more expensive than you will find in the open market because most banks and building societies provide their own life insurance policies and do not search other insurance companies' prices before making a recommendation to you. You can get life insurance advice from your bank but few provide additional services to put your life insurance policy in trust and some will refer you to a life insurance specialist to do this.

How to choose life insurance

Critical illness cover - do you need it?

Critical illness insurance pays a lump sum or an income to you if you are diagnosed with one of a number of specified serious illnesses. It can be added to life insurance or bought separately and is popular due to the increasing incidence of cancers, heart disease and other serious illnesses. You're about 5 times more likely to need to claim on critical illness insurance than on a life insurance policy during your working life. Check out our article "Critical illness - What is it and is it worth having?"

Income protection - do you need it?

Income protection insurance which is sometimes called sick pay insurance replaces your income if you're unable to work. You can cover up to 65% of your untaxed income so that if your doctor signs you off work as unfit, you'll be able to claim this benefit. Some employers would continue to provide an income while you recover so you should check this before buying income protection insurance. Check out our article "Income Protection: Do you really need it?"

Should I buy term or whole life insurance?

Term life insurance pays if you die within your chosen term - number of years you are covered. Paying off your mortgage or debts and raising your children won't last forever and you only need to insure yourself until you've completed these responsibilities and this matches how term life insurance works. It will provide better value for money because the insurance company only pay out if you die within the term of your policy.

Whole life insurance pays out when you die and not if you die and because it has to pay out eventually, it will cost more than term life insurance. Funeral expenses and inheritance are among the long-term bills you may wish to fund with a Whole life insurance policy.

You can work out which is best for you in our article, "Which is better – Term or whole of life insurance?".

Why you should put life insurance in trust

A trust is a legal document that allows a policyholder to stipulate who they wish the life insurance money to go to and in what proportions if there is more than one beneficiary. This not only provides peace of mind but putting the money in trust will also prevent it from being added to your estate protecting it from a potential 40% inheritance tax. You can read more in our article, "Writing your life insurance in trust".

Is it better to get joint or single life insurance?

Having joint financial responsibilities like rent, mortgage payments, bills and parenting might make joint life insurance look like the obvious and best answer - it might be the obvious answer but it's almost never the best one.

Joint life insurance covers both your lives and it'll pay out once if either of you dies but then it stops and there's no ongoing life insurance for the surviving person. That's not good - especially if you have children. Furthermore, if you both died together, it would still only pay out once and most people recognise that losing both parents is going to be far more financially devastating than losing one.

There is very little difference in the cost of a joint life insurance versus two single life policies as we demonstrate below. Also, if one of you has health conditions, you might even be better off buying life insurance with the insurance companies that are best for you separately.

Joint life insurance v 2 single life insurances - Cost comparison

2 people aged:	1 x Joint Life Insurance Policy (Maximum potential payout is £200,000)	2 x Single Life Insurance Policies (Maximum potential payout is £400,000)
20 years old	£7.22	£8.44
30 years old	£11.42	£12.46
40 years old	£22.02	£24.52
50 years old	£51.96	£55.86

*prices based on non-smokers and life cover for 20 years

How does death in service work and can I offset it against how much life insurance I need to buy?

If you have life cover through your employer - death in service benefit - you can choose to deduct this from the amount of life insurance you will need to buy. Death in service is usually calculated as a multiple of your salary and can be between 1 to 10 times your annual salary. Some people choose not to take their death in service into consideration when working out how much life insurance they need because they may lose it if they change jobs or their employer stops providing it - seeing it more as a bonus if it does pay out.

Most people need to cover multiple things during their lives and buying a separate life insurance policy for each one isn't always economical. Speaking to a life insurance expert* can help you consolidate your needs and wishes into a cost-effective and manageable life insurance solution. Read on to find out how to do this.

How to buy the best and cheapest life insurance?

Life insurance companies and brokers advertise in many places - from television to social media timelines to football pitches. Although the brand of a particular life insurance company may be appealing to you, most people prefer to compare life insurance prices and quality before making their decisions. Many large insurance companies such as Aviva, Legal & General, and LV= provide other types of insurance such as general insurance policies for car insurance, home insurance and pet insurance. However, life insurance is not normally renewed each year and is often a long-term contract so you may wish to benefit from guidance about life insurance.

At Money to the Masses, we have tried and tested many ways to buy life insurance and found that speaking to a specialist life insurance adviser or regulated financial adviser offers the best outcome in terms of service, price and getting a solution that suits your needs. So, speaking to a specialist life insurance adviser can be extremely helpful in working out how long you should buy life insurance for, how much life insurance will be adequate and the type of life insurance policy that will provide the best value for money based on how much you wish to spend. They have access to the whole market, provide expert regulated financial advice and can access some of the best prices too.

You can arrange to speak to a specialist life insurance adviser by completing this short form* and as a Money to the Masses reader, you'll receive up to £100 cashback.

 

If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. This link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article