How does life insurance work?
Life insurance works in much the same way as any other insurance policy - you pay a monthly premium, and your insurer pays out in the event of a claim. Where life insurance differs is in who your pay out goes to.
The lump sum that's paid out after you die, normally forms part of your estate. Your estate is the total value of everything you leave behind when you die. The estate usually passes to your named beneficiaries, who are the people you choose to leave something behind for.
How much your loved ones get depends on the type of policy you take out. There are policies that pay out after you’ve died or while you’re still alive.
Standard life insurance, also called term life insurance, pays out the same amount if you die in week one or week 1000.
Decreasing term life insurance payouts change over the course of the policy - the longer you get into the policy, the more they decrease. It's normally used to cover your mortgage, which should also decrease over time.
Critical illness pays out if you’re diagnosed with a serious illness or are severely injured. This lets you focus on getting better without worrying about how you’ll pay the bills.
What affects the price of life insurance?
There are a few things that could affect how much life insurance costs.
These typically include:
- Your age
- Amount of cover
- Policy length
Your age. The older you are, the more you’re likely to pay. This is because you’re more likely to die during the policy term if you start the policy at an older age.
Lifestyle choices such as drinking, smoking, including vaping and use of nicotine replacements, and other risky behaviours, can all edge up your premiums
Weight. If you’re very overweight, your likelihood of developing an obesity-related illness increases, and so does your premium cost
Medical history and pre-existing conditions like asthma, or a family history of certain diseases, could also see you paying more
Amount of cover you want. Typically, the higher the pay-out you’re looking for, the higher your premiums are likely to be. See our guide for advice on how much life insurance cover you need, or use our life insurance calculator to work out exactly how much cover you need
Policy length can also affect your life insurance policy price because the longer you want the term to be, the more likely it is for a claim to be made under the life insurance policy which generally means the price will increase with term length
Salary plays a part too. The more you earn, the higher your expenses are likely to be. So you’ll need more cover to maintain your family’s standard of living which means a higher premium price
Occupation. If you’re a fireman or an oil rig worker, or have another high-risk job, your premiums will probably be higher than those with low-risk jobs, such as an office worker or milk man
Take a look at our guide for a deeper dive into how life insurance premiums are calculated and what that means for you.
What doesn’t life insurance cover?
With a standard life insurance policy, if you die due to an accident or illness during the policy term, your insurer should pay out. But there are a few cases where it might not.
These could include death as a result of:
- Drug or alcohol misuse
- Suicide or self-inflicted injuries
- Gross negligence or a reckless act
- War or terrorism
Drug and alcohol misuse are almost never covered. But some of the above cases could be, depending on your insurer. If you've any concerns, it’s worth checking with them before you take out a policy.
Or for an overview of the reasons life insurance won’t pay out, isn’t covered, take a look at our guide on life insurance exclusions.
What our life insurance expert says
Life insurance can be a great safety net – but only if you get it right. Take out too little cover and it might not be enough to support your family when you’re gone. Too much and you could be paying for cover you don’t need.
Tally up your outgoings before you get a quote, then tie your cover amount to the figure you land on. You can't go far wrong this way.
Life insurance expert
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Whether you pay tax on your life insurance payout depends on how big it is.
Life insurance contributes to your estate. This is the total value of everything you pass on when you die:
- If your pay-out brings your estate’s worth to more than £325,000, then you’ll pay 40% tax on the amount over £325,000
- If your estate amounts to less than £325,000, even after your payout, they pay no tax on it
Even if your payout takes you over the £325,000 limit, you could still avoid paying tax on it by writing your life insurance in trust. Here your payout is put into a trust, which is then paid directly to your beneficiaries. Your payout should be seen as separate to your estate, meaning your beneficiaries should pay no tax on it.
There are other benefits to writing your life insurance in trust. Your payout might be able to sidestep complicated legal proceedings after you die, meaning your loved ones could get the money quicker. You can also explicitly name the beneficiaries of your trust, meaning that your payout goes to exactly who you want it to, when you want it to.
In most cases, you can get life insurance if you have pre-existing conditions. Illness that could be classes as pre-existing conditions include:
- High blood pressure
If you have any of these, you should still be able to get cover. You might just have to pay more in premiums.
Life insurance providers calculate your risk of dying during the policy term. You’re then offered cover based on those calculations. Sadly, since pre-existing conditions increase your risk of death before your policy ends, your premiums are likely to be higher than those with no medical conditions.
There are also a few pre-existing conditions that might not be covered. Terminal illnesses usually aren't, and other high-risk illnesses could make it tricky to find cover.
What’s defined as a ‘high-risk illness’ differs between providers. So, it’s worth getting a quote to see whether your pre-existing condition can actually be covered.
Life insurance covers death as a result of illness or injury. To get a payout, any illnesses you die of must:
- Have developed during the cover period
- Not have been known to you before you took out your policy, however this can vary from policy to policy
As long as you meet these criteria, your beneficiaries should get a payout.
Yes, if you’re diagnosed with a terminal illness, most policies should pay out while you’re still alive A terminal illness is usually defined as one that:
- Can’t be cured
- Gives a life expectancy of less than 12 months
If that’s the case, you should be able to get your whole pay-out before you die depending on your policy. This might help support your family while you’re ill, pay off any outstanding debts, or generally make the rest of your life that little bit easier.
How much life cover you need depends on what you want your payout to do.
It can be hard to settle on a final amount. If you’re struggling to figure out just how much life insurance cover you need, try our guide or let our life insurance calculator do the hard work for you.
Here are some things to consider when working out how much life insurance cover you might need:
- If you want it to support your loved ones after you die, think about how much money they’d need to keep living comfortably without you. Think about day-to-day living costs, rent or mortgage payments, and any other financial commitments they might struggle to meet.
- If you have any ongoing debts, it’s worth factoring these in too
- If you have a mortgage, you might want your payout to cover it fully. If so, think about how much you've got left to pay and factor this into your cover amount. Or you might just want your payout to act as inheritance for your children. Here, think about exactly how much you’d want to leave behind for them
The short answer is for as long as you need it.
If you’re taking out a policy to cover your mortgage, it’s a good idea to tie the policy length to the remaining years you have left to pay. If you have 20 years left on your mortgage, getting cover for at least 20 years makes the most sense.
If you’re just after a payout to support your family once you’re gone, think about how long they’re likely to be financially dependent on you. This could be 25 years or it might be five.
Most policies will have a minimum length you need to hit, too. This differs from policy to policy but it's likely to be between one and five years. It all comes down to what you want your policy to cover you for.
Life assurance is a life insurance policy that covers you for your whole life.
Normal life insurance runs for a set number of years, say 25. If you die during this period, your beneficiaries get a payout. If you survive past that 25-year period, your policy ends. You then either have to find a new policy or live without cover.
Life assurance has no set cover term. You sign up, and as long as you keep paying your premiums, your beneficiaries get a payout, no matter when you die. The obvious benefit here is that, as long as you don’t die in a way that isn’t covered by your policy, a payout is usually guaranteed. The downside is that a guaranteed payout tends to come at a higher premium. So your monthly payments might be more than they would for standard life insurance.Whether the extra premium cost is worth it is up to you. Read our whole life insurance guide for the benefits life assurance could offer you.
Yes, you can still get life insurance if you’re a smoker. It’s just usually a little more expensive than cover for non-smokers.
As smoking is linked to several health conditions, insurers assume your likelihood of dying during the policy is much higher. A higher risk of death means you’re riskier to insure, which means your premiums could be higher.
There are ways to bring your insurance costs down though. Proving that you’ve given up nicotine for at least 12 months could get you a better deal. But bear in mind that nicotine replacements like e-cigarettes and sometimes nicotine patches or gums, could still see you classified as a smoker. You have to prove that you’ve gone 12 months completely nicotine free to reap the full financial benefits of quitting.
Some insurers might ask you to have a medical when you apply for life insurance. But others might not.
Whether you’re asked to have one is often tied to your lifestyle habits. If you’re a young, fit, non-smoker with no pre-existing conditions, you’re less likely to be asked to have one than someone older with a complicated medical history.
Specific no-medical policies do exist, though. Many over 50 policies offer you cover without the need to have a medical. And some whole life policies let you take out cover medical-free, too.
If you’re concerned about having to have a medical to get life insurance, it’s often best to contact the insurer directly to see if you’ll be asked to have one.
Legally, you can have as many life insurance policies as you like.
Some people take out a decreasing term life insurance policy to cover their mortgage, and a separate standard policy to act as inheritance for their loved ones when they die.
Taking out two policies could be handy if you have a death in service benefit but are worried the payout might not be big enough. Most death in service policies pay out four times your annual salary. Personal life insurance usually pays out around 10 times your salary. Having both in place could ensure your family gets a big enough payout to live comfortably after you're gone.
Some people also take out standard life insurance to boost their joint life insurance payout. The joint policy payout could then be used to cover their half of their family’s outgoings after they’re gone. Their personal policy payout could then act as inheritance for their loved ones.
However, taking out more than one policy isn’t always the best option. Two policies means two premiums, two lots of admin, and two sets of arrangements to be made. It’s often easier just to speak to your insurer about tweaking your current policy, to ensure it covers exactly what you need it to when you’re gone.
A beneficiary is the person who gets your life insurance payout when you die.
Most insurers ask you to name your beneficiaries when you sign up. So it’s a good idea to have an idea of who you want them to be before you take out a policy. While most people choose to name their partner or their children as their inheritors, there’s no rule dictating who you must leave your payout to. You could leave it to a friend, or even donate it to a charity.
There’s also no limit on the number of people you can name as beneficiaries. So, if you have a large family, you could split your payout between all of them.
You could also opt to put your payout into a trust. This is especially useful if you’re concerned that your payout might be subject to inheritance tax. Putting it into a trust is an easy way to avoid this.
Yes, you can cancel your life insurance if it’s not working for you. But it’s not a decision that should be taken lightly. Cancel now and it could affect your premiums later. If you decide to sign back up at a later date, you might have to pay more in premiums for the same level of cover you enjoy now.
You’d also be older when you decided to sign back up, meaning your premiums could be higher. You might also have developed a condition in the period between cancelling and signing back up. If that illness is classed as a pre-existing condition, your premiums could be higher again.
So, while you can cancel your life insurance, it’s often better to contact your insurer first. If you’re cancelling due to your premiums being too high, they might be able to offer a tweaked policy that better suits your needs. This way, you keep your cover without having to pay more if you change your mind further down the line.
If you’ve decided it’s really not for you though, find out how to cancel life insurance with our handy guide.
This depends on your circumstances.
Joint life insurance insures two people under one policy. If either person dies, the other person gets the payout and the policy ends.
The benefits of joint life insurance is that there’s less admin with only one policy to look after. And the monthly premiums are likely to be less than with two separate life insurance policies.
The drawback is that it’s only designed to cover one person. If both people die at the same time, their beneficiaries only get a single payout. This might not be enough to cover all debts and support them financially.
Some people might use a joint life insurance policy to cover their mortgage or debts, and then have a separate policy to financially support their dependents. This does mean having to look after multiple policies, and paying two sets of monthly premiums.
If you need more help on what’s best for you, get in touch with the life insurance provider and see what option works.
Absolutely you can put your life insurance policy in trust.
When you die, everything you own - including your life insurance payout - forms part of your estate. If your estate’s value exceeds £325,000, your dependents usually have to pay 40% tax on everything above that threshold.
Putting your life insurance policy in trust separates it from your estate, which means it doesn’t get hit with inheritance tax. You name the beneficiaries of the payout and the process of getting the money might be faster than if you let it form part of your estate.
The main thing to remember is that once you’ve put a life insurance policy in trust, it’s usually an irreversible decision. So if you’re not certain about the particulars of who the payout is meant to go to.
You can change your life insurance policy - all you need to do is get in touch with your insurance provider. In fact, it’s a good idea to regularly review your policy to make sure it continues to meet your needs.
You might have started a family since taking out the policy, or remortgaged your home. So, the life insurance policy you took out in your early 30s might not be sufficient to provide for your loved ones.
You have two options:
- Increase or reduce the amount of cover you have to reflect your circumstances
- Cancel the policy and shop around for a better deal
Terminal illness cover should come as standard on a life insurance policy, whereas critical illness cover is an optional extra that comes with an added cost.
Life insurance policies with terminal illness cover might offer you a payout if you’re diagnosed with a terminal illness. This allows you to set your affairs and enjoy your time with your loved ones.
The definition of ‘terminal’ might vary between insurers, but generally it’s where an illness can’t be cured and gives a life expectancy of less than 12 months.
Critical illness cover, on the other hand, is designed to pay out to help you while you recover from a serious illness or injury. This could help if you’re out of work and need to pay your bills, or if there are medical-related costs.
The lump sum you get with critical illness cover is usually lower than what you might expect to get with a life insurance payout. This is because critical illness cover is meant to support you for a shorter period of time while you recover.
You can often add critical illness cover to your life insurance policy, depending on the provider.
When you use our life insurance comparison service, you’ll see a list of providers and prices in one place. There you’ll have the option of adding critical illness cover to your quote and how much extra it might cost per month.
There’s no legal obligation to get a life insurance policy when you get a mortgage. Your mortgage provider might insist that you have one in place - they might even press to have you get a life insurance policy through them.
It’s worth weighing up your options and comparing life insurance quotes before you agree to anything. Never take the first offer as you could lock yourself out of a better deal elsewhere.
There are life insurance policies specifically catered for mortgages. These mortgage life insurance policies are a kind of decreasing term policy. This means that the amount you’re covered for decreases over time in line with your outstanding mortgage.
Mortgage life insurance is one way to ensure that your biggest outstanding debt isn’t passed onto your dependents after you die. They could use that lump sum to pay off the mortgage and not worry about having to make the repayments.
It’s good practice to look over your life insurance policy whenever you have a big life change. That could be:
- Having a child
- Moving home
- Remortgaging your house
- Changing jobs
- A large increase or decrease to your debts
Many people like to review their insurance needs once a year to make sure everything is covered should something unexpected happen.
Remember that a life insurance policy is designed to provide some degree of financial stability and comfort to your loved ones after you die. So, it’s a good idea to regularly make sure the policy is still fit for purpose.
If you’re lucky enough to have a life insurance policy through your employer, it’s worth checking the small print to see exactly what you’re covered for, and how much.
Many employers offer a benefit called death in service. This usually provides a lump sum of around four times your annual salary if you die while employed by the company.
You lose this benefit if you stop working for that employer, whereas a personal life insurance policy stays with you.
If your employer offers a dedicated life insurance policy, you might find that it won’t provide enough for your family after you’re gone.
It’s important to calculate how much life insurance cover you need before agreeing to a policy so that you can be sure your family’s needs are met.
And even if you have a death in service benefit with your employer, you could still get a dedicated life insurance policy to increase the size of your payout.
If you’re struggling to meet your monthly repayments, you should get in touch with your life insurance provider as soon as possible and explain the situation. They might be able to tweak your policy to lower the payments, or work out a payment plan that suits you.
If you miss a payment, you might not necessarily lose your cover, so long as you’re able to cover the amount you missed and keep making regular payments in future.
But if you miss several in a row, your life insurance provider could cancel your policy. This leaves you with no payout and months or even years of wasted premiums.
Some insurance providers have an allowance of how far behind you’re allowed to fall e.g. you have to make your payment within 30 days of the missed payment date. But this varies between providers, so it’s best to get in touch with them before it gets to that stage.
Income protection insurance is different to life insurance. It’s a policy designed to cover your bills if you’re out of work due to illness, disability or are unemployed. Rather than a lump sum, income protection provides you with a regular income, usually a percentage of your salary, until you’re able to return to work.
Whether or not you need income protection is entirely up to you. But it’s worth thinking about whether your finances could take a hit if you were out of work for a year or so, and whether having this regular income would benefit you.
The actual lump sum your beneficiaries get from your life insurance payout isn’t taxed in the same way that your salary is taxed.
But your life insurance payout forms part of your estate. And, unless you write your life insurance policy in trust, your beneficiaries pay 40% inheritance tax on anything in your estate that’s above the £325,000 threshold.
In insurance terms, a clawback is the amount of commission a salesperson has to give back to their company if someone they sold a policy to cancels within a certain time frame.
Some life insurance providers offer their salespeople a commission for each sale. Given that life insurance is a policy that’s designed to last decades, this commission is often worked out on the basis that the policy should be active for a minimum period of time e.g. five years.
If the person who bought that policy cancelled their life insurance after four years, the salesperson might have to give back a percentage of their commission to the provider.
If you have a joint life insurance policy, you should get a lump sum payout if your partner dies. The joint policy would then end.
There are other benefits you could be entitled to including:
- Funeral Expenses Payment. This helps people on low incomes afford funeral costs such as burial, cremation, flowers and a coffin.
- Bereavement Support Payment. This provides monthly payments if your partner dies. You must claim within three months of your partner’s death to get the full amount, but can claim up to 21 months after their death.
For more information, visit GOV.UK.