Life Insurance Basics
This article was last updated:
Not sure where to start when it comes to life insurance? Then this is the article for you!
This article was last updated:
Not sure where to start when it comes to life insurance? Then this is the article for you!
Do I need life insurance? Not if you're single. But if you have a partner or children who depend on you financially, it's important to consider.
In this article we'll cover the fundamentals of life insurance, the different types of life insurance policies that are available, and some of the current hot topics in the industry.
It's in a "quick fire Q&A" style, but you can follow the links to dig deeper.
Fundamentals
2. How much life insurance do I need?
3. What's the average cost of life insurance in the UK?
Types
Hot Topics
10. What the removal of the indexation allowance means for 'Whole of Life' insurance holders
11. Life insurance with critical illness cover and the best critical illness insurance
12. Free Life Insurance for New Parents
13. Key considerations when choosing life insurance
14. Medical conditions and life insurance
15. Lifestyle and Life Insurance issues
17. Life insurance and inheritance tax
18. Do you have to have life insurance for a mortgage?
19. Life insurance vs life assurance
At its simplest, life insurance is a way of making sure your loved ones and your responsibilities are taken care of financially when you die.
From a more technical perspective, a life insurance policy is a contract between you and an insurance company, where the company agrees to pay out a specified sum on your death.
Many people buy life insurance to give them peace of mind that their partners or children (or "beneficiaries", to use the jargon), will be financially secure.
In the same way, life insurance often goes hand-in-hand with a mortgage, so that there is a way of settling outstanding mortgage debt if the breadwinner passes away before the loan has been fully repaid.
How much life insurance you need depends on your personal circumstances. You will need to consider how much your dependents would need to maintain their current lifestyle if you were no longer around, as well as any outstanding debts such as a mortgage.
According to the Office of National Statistics, the average UK mortgage debt is around £140,000, so most life insurance policies taken out today are likely to have a "sum insured" higher than that amount.
On the other hand, if you don't have a partner or children, you probably don't need life insurance at all.
The average cost of life insurance varies depending on a number of factors, including your age, health and lifestyle. Generally, the younger and healthier you are, the cheaper your life insurance will be.
To give one example: the average cost of life insurance was £7 - £11 per month, based on quotes received for a 35-year-old non-smoker with a clean medical history, looking for a level term life insurance policy for 25 years (quotes retrieved in Q1 2022).
If you want to get an idea of the cost of life insurance with different providers, check out the sample quotes we got when compiling our life insurance reviews:
There are two main types of life insurance: term life insurance and whole of life insurance.
Term life insurance provides cover for a set period of time, usually between 5 and 30 years. If you die during the term of the policy, your loved ones will receive a cash sum.
Whole of life insurance, on the other hand, covers you for your entire life. This means that as long as you keep up with the premiums, your loved ones will receive a cash sum when you die, no matter when that is.
Term life insurance is the most popular type of life insurance. It is generally cheaper than whole of life insurance, as it only covers you for a set period of time.
The most common term lengths are 5, 10, 20 and 30 years. You can usually choose to pay your premiums monthly or yearly, and you can usually increase or decrease the amount of cover you have during the term of the policy.
Learn more about term life insurance
Over 50s life insurance is a type of whole of life insurance specifically designed for people aged over 50. It does not require a medical exam, and you are guaranteed to be accepted for cover.
Learn more about Over 50s Life Insurance.
Whole of life insurance covers you for your entire life, as long as you keep up with the premiums. This means that your loved ones will receive a cash sum when you die, no matter when that is.
Whole of life insurance is usually more expensive than term life insurance, as it is a more comprehensive policy.
Learn more about Whole of Life insurance
Joint life insurance is a type of life insurance that covers two people, usually a couple. If one person dies, the other will receive a cash sum. It can be a cheaper way to insure two people, as it is often cheaper than two separate policies.
Funeral cover is a type of insurance that pays for your funeral costs. It is usually an add-on to a life insurance policy, but it can also be taken out as a standalone policy. It can be a valuable way to reduce the financial burden on your loved ones at an already difficult time.
The indexation allowance was a tax relief that previously applied to whole of life insurance policies. It was removed on 6 April 2020, which meant that policyholders had to pay more tax on their life insurance policy.
Critical illness insurance pays out a cash sum if you are diagnosed with a specified critical illness, such as cancer or a heart attack. This can be an important addition to a life insurance policy, as it can provide financial security if you are unable to work due to illness.
There are a number of different critical illness insurance policies available, so it is important to compare them to find the best one for you - we've written more about critical illness cover in this article.
New parents can get free life insurance from various companies (including Aviva) through a life insurance product called Free Parent Life Cover. It provides £15,000 of cover for 12 months.
There are no downsides to having it, but it's important to bear in mind that it isn't a replacement for comprehensive life insurance cover, as it's only for the short term and for most people the pay out would not be enough to cover major costs like repaying a mortgage.
When choosing life insurance, it is important to consider your personal circumstances and needs. You will need to decide how much cover you need, as well as the type of policy that is right for you. But it is also important to compare the different life insurance companies to find the best one for you.
If you have a medical condition, you may still be able to get life insurance, but the premiums will be higher. It is important to declare any medical conditions when applying for life insurance, as failure to do so could invalidate your policy.
Your lifestyle can affect the cost of your life insurance. Things like smoking, being overweight and having a dangerous job can all lead to higher premiums.
Most life insurance policies have exclusions, which means that there are certain things that they will not cover. The most common exclusions are pre-existing medical conditions and dangerous activities. Exclusions are the reason why a small number of life insurance claims are rejected.
If you have life insurance, the payout from the policy can be used to help pay for inheritance tax (IHT). This means that your loved ones will not have to sell your assets to pay the tax bill. Read more about life insurance and IHT here.
No, there is no legal requirement to get life insurance alongside a mortgage, and mortgage lenders don't base their lending decisions on whether you are buying life insurance at the same time.
However, if you have a partner or children, it is generally accepted that it's important to have life insurance in place. This is because the mortgage will still need to be paid if you die, and your family may not be able to do this without your income. People usually choose term life insurance to cover off the cost of repaying a mortgage in the event of their death.
On the other hand, if you are single and have no dependents, there is no point considering need life insurance.
Life insurance and life assurance are two terms that are often used interchangeably, but they are actually quite different.
Life insurance is a type of insurance that pays out a cash sum if you die during the term of the policy.
Life assurance, on the other hand, is a type of insurance that pays out a cash sum when you die, no matter when that is.
If you want to buy life insurance, you have a few different options:
Life insurance can be a tax deductible business expense in certain cases. For example, if the life insurance policy is taken out on a key employee, the premiums can be deducted as a business expense. Additionally, if the life insurance policy is used as collateral for a business loan, the
Our experts review costs, policy features, and customer feedback on LV='s range of Life Insurance policies.
Get the low-down on Royal London's life insurance policies, from prices to customer feedback to claims.
Copyright © 2023 itsforlife.co.uk