Protecting the People Who Depend on You
Life insurance can provide financial support for the people you leave behind if you die.
It can help with costs such as:
- Mortgage or rent
- Household bills
- Other debts
- Childcare
- Everyday living costs
- Funeral costs
Whether you need life insurance, and how much cover is appropriate, depends on your circumstances and the people who rely on you financially.
Do You Need Life Insurance?
Not everyone needs life insurance.
It may be worth considering if:
- You have children or other dependants
- A partner relies on your income
- You share significant financial commitments
- Your family could struggle with the mortgage or other debts if you died
- You want to leave financial support for someone
If nobody depends on you financially and you have enough savings or other protection in place, life insurance may be less important.
Also check whether your employer provides death-in-service cover before buying additional insurance. Remember that employment-based cover will normally end if you leave that employer.
Life Insurance and Your Mortgage
You do not normally have to take out life insurance simply because you have a mortgage.
However, you may want it if somebody else would struggle to pay the mortgage or remain in the home if you died.
For example, imagine two people buy a home together but rely on both incomes to make the mortgage affordable.
If one person dies, the mortgage does not simply disappear.
Appropriate life insurance could provide money to reduce or repay the mortgage and ease the financial pressure on the surviving household.
How Does Life Insurance Work?
You choose an amount of cover and pay the insurer a premium.
If you die while covered by the policy and a valid claim is made, the policy pays according to its terms.
The amount and duration of cover depend on the policy you choose.
Life insurance should not be confused with insurance designed to protect you while you are alive.
Income protection can provide an income if illness or injury prevents you from working.
Critical illness cover can provide a lump sum if you are diagnosed with a specified condition that meets the policy definition.
We will cover both separately.
Term Life Insurance
Term life insurance covers you for an agreed period.
For example:
20 years
or
25 years
If you die during that period and the claim meets the policy terms, the policy can pay out.
If you survive beyond the end of the term, the cover normally ends without a payout.
There are several common forms of term insurance.
Level Term Insurance
The amount of cover stays the same throughout the policy term.
For example, a policy could provide:
£200,000 of cover for 25 years.
Subject to the policy terms, that amount remains £200,000 throughout the term.
Decreasing Term Insurance
The amount of cover reduces over time.
This type of policy is often associated with a repayment mortgage, where the outstanding mortgage balance is also expected to reduce over time.
Increasing Term Insurance
The amount of cover increases over time, typically to help protect its value against inflation.
The premium may also increase, depending on how the policy works.
Whole of Life Insurance
Whole of life insurance is designed to provide cover for your entire life rather than for a fixed term, provided the policy remains in force and its conditions are met.
Because a payout is expected whenever death occurs rather than only during a particular term, this type of cover can work differently and may cost considerably more than term insurance.
For many households looking primarily to protect a mortgage or dependants for a particular period, term insurance may be the more relevant product to compare.
Single or Joint Life Insurance?
You may be able to buy cover individually or jointly with another person.
A single-life policy covers one person.
Two people could therefore each have their own policy.
A joint-life policy covers two people but commonly pays only once, usually following the first death, after which the policy ends.
A joint policy can sometimes cost less than two individual policies, but two separate policies can potentially provide two separate payouts.
Do not compare them on premium alone. Consider what protection each arrangement would actually provide.
How Much Cover Might You Need?
There is no single amount that is right for everyone.
Think about what the people you leave behind might need financially.
This could include:
- Outstanding mortgage
- Other debts
- Household expenses
- Childcare
- Education costs
- Funeral costs
- Loss of your income
- How long financial support may be needed
Then consider what resources would already be available, such as:
- Savings
- Investments
- Your partner’s income
- Existing insurance
- Death-in-service benefits
The aim is not necessarily to insure yourself for the largest amount available.
It is to understand the financial gap your death could leave.
How Long Should the Cover Last?
Again, think about why you are buying the insurance.
If the main purpose is mortgage protection, you might consider how long the mortgage has left to run.
If you are protecting children, you might think about how long they are likely to remain financially dependent.
If your circumstances change, review whether the cover still matches what you need.
What Affects the Price?
The cost of life insurance can depend on factors including:
- Age
- Health
- Smoking
- Lifestyle
- Occupation
- Medical and family history
- Amount of cover
- Length of cover
Generally, the insurer assesses the likelihood of having to pay a claim during the period being insured.
Answer the Insurer’s Questions Accurately
This is particularly important.
When applying, you may be asked about your health, medical history, smoking, occupation and other circumstances.
Answer the questions carefully, accurately and honestly.
Problems can arise at claim stage if an insurer believes important information was misrepresented or relevant information it asked for was omitted. Depending on the circumstances, this can affect how a claim or policy is treated.
If you are unsure what a question means, ask the insurer, broker or adviser rather than guessing.
Who Receives the Money?
Think about who you want the policy to benefit.
Depending on how the policy is arranged, the proceeds might form part of your estate or be directed through other arrangements.
Some life insurance policies can be placed in trust. This can affect how and when the proceeds reach the intended beneficiaries and can also have estate and tax implications.
Trusts can have legal and tax consequences, so consider appropriate professional advice if you are unsure whether one is suitable.
Check What You Already Have
Before buying a new policy, check whether you already have protection through:
- Your employer
- An existing life policy
- A pension or workplace benefit
- Another financial arrangement
For example, an employer may provide a death-in-service benefit, often linked to your salary.
That may reduce the additional cover you need, although employer-provided protection can disappear when you change or leave your job.
Do Not Cancel Existing Cover Too Soon
If you decide to replace an existing life insurance policy, be careful about cancelling it before the replacement is fully in place.
Your age or health may have changed since you bought the original policy, which can affect the price or availability of new cover.
MoneyHelper recommends ensuring replacement cover is properly established before cancelling the existing policy.
Compare More Than the Monthly Premium
When comparing life insurance, consider:
Amount of cover
How much could be paid?
Term
How long does the cover last?
Type of cover
Level, decreasing, increasing or another arrangement?
Premium
What will you pay, and can it change?
Policy conditions
When will the policy pay?
Exclusions
Are there circumstances in which a claim would not be covered?
Additional features
Are benefits such as terminal illness cover included, and exactly how are they defined?
The cheapest policy is not necessarily the most appropriate one.
Life Insurance Checklist
Before buying, ask yourself:
Who am I protecting?
Who would be financially affected if I died?
What would they need?
Consider the mortgage, debts and ongoing living costs.
How much cover do I already have?
Check savings, existing policies and workplace benefits.
How long do I need protection?
Think about your mortgage, dependants and future plans.
What type of policy suits that need?
Compare the way different policies work rather than their names alone.
Can I afford the premium?
Life insurance only provides protection while the required cover remains in force.
Have I answered every question accurately?
Check your application carefully before submitting it.
Compare Life Insurance
Life insurance policies can differ considerably in the protection they provide.
Do not compare only:
£X per month versus £Y per month.
Compare what you actually receive for that premium.
Energility’s insurance comparison service is coming soon.
Until then, our guides can help you understand the products and features you are comparing.
The Bottom Line
Life insurance is fundamentally about one question:
What would happen financially to the people who depend on me if I died?
If the answer reveals a significant financial gap, life insurance may be one way of protecting against it.
Work out who needs protecting, how much they might need and for how long before comparing policies.
And remember that life insurance is only one form of protection.
Income Protection and Critical Illness Cover solve different problems, so we will treat each of those separately rather than trying to squeeze all three into one guide.
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