Life insurance

Life insurance
The types of cover that can help to protect your family’s finances

Considering how your family would manage financially in the event of your death is a challenging yet crucial subject. This guide aims to assist you in determining if life insurance is a suitable option for you. It explores the various types of coverage available and provides guidance on locating the most affordable life insurance policy that aligns with your requirements.

What is life insurance?

Life insurance serves to offer financial assistance to your loved ones after your passing. By paying a monthly premium to your insurance provider, you ensure that if you die within the policy’s duration, your beneficiaries will receive either a tax-exempt lump sum or a series of regular monthly payments.

In essence, life insurance provides reassurance that your family or dependents will be shielded from financial difficulties in the event of your death.

Benefits of life insurance

Life insurance serves as a financial safety net, allowing dependents to manage their expenses and maintain their quality of life after a loss. This coverage can help with various costs, including:

• Mortgage costs – to pay off, or pay towards, any outstanding mortgage debt.
• Debts and loans – to clear other outstanding borrowing, such as loans.
• Funeral costs – such as burial and other associated costs.
• Future living costs and expenses – such as rent payments and bills.
• Educational costs – such as school fees or money towards further education.

If you already know what type of life insurance you want, skip down to find out how to buy life insurance the cheapest way.

What are the different types of life insurance?

Life insurance comes in several varieties. Below, we outline the different policies to assist you in determining which type of coverage may be most suitable for your requirements.

• Level-term life insurance
• Decreasing-term life insurance
• Over 50s’ life insurance
• Family income benefit
• Whole-of-life insurance
• Joint life insurance

Level-term life insurance

Level-term life insurance is the most straightforward form of life insurance available. When you take out a policy, you specify the fixed amount you wish to be paid out, such as £200,000. Additionally, you select the duration of the coverage in years, for example, 25 years. Throughout the policy’s lifespan, the coverage amount remains constant.

Generally, the cost increases with higher coverage amounts and longer terms. You will be required to pay a monthly premium that continues until either the policy pays out due to your death during the term or until the term concludes. It’s important to note that coverage typically cannot extend beyond the age of 80, although this may vary by provider.

Decreasing-term life insurance

Often referred to as ‘mortgage life insurance,’ decreasing-term life insurance is intended to pay off your mortgage in the event of your death during the policy term. Since your mortgage balance typically decreases annually, the payout amount also diminishes over time, aligning with the remaining mortgage debt.

Because the potential payout decreases each year, this type of insurance is generally more affordable than level-term life insurance. However, if your goal is to provide a lump sum for your dependents to manage other debts and ongoing expenses, a level-term life insurance policy may be more suitable (although it’s possible to have both types).

Over-50s’ life insurance

This article targets older adults who might find it difficult to afford a conventional life insurance policy, which evaluates eligibility and premium rates based on various factors such as age and health status.

In contrast, an over-50s life insurance policy guarantees acceptance for individuals up to ages 80 or 85, regardless of any pre-existing medical conditions. However, this type of coverage can be costly since payments must continue until the policyholder’s death, potentially resulting in beneficiaries receiving less than the total amount contributed. For more details, refer to our Over-50s Life Insurance guide.

Family income benefit

This plan offers a monthly tax-free payment for the duration of the policy, for instance, £10,000 annually over a ten-year period. If you were to pass away five years into the policy, your beneficiaries would receive approximately £800 each month for the remaining five years.

Since the annual amount does not accumulate, the longer you live, the less the insurer is required to disburse, which generally makes these policies less expensive compared to level-term options.

Whole-of-life insurance

In contrast to level-term insurance, which is designed for a specific duration and typically aligned with a mortgage, this type of coverage remains in effect until the policyholder’s death.

These policies are frequently linked to investments, although this is not always the case, and they primarily serve to address inheritance tax liabilities. Essentially, the benefit provided is intended to settle the inheritance tax owed upon death, with the policy terminating at that point rather than after a predetermined period.

Such policies tend to be costly, and it’s possible to continue paying for them even after any mortgage or other debts have been fully repaid.

Joint life insurance

Joint life insurance, often referred to as “couples insurance,” “partners insurance,” or “first-to-die life insurance,” can be purchased as a shared policy for you and your partner. You have the option of either level-term life insurance or decreasing-term life insurance for this purpose.

Typically, a joint life insurance policy is more cost-effective than acquiring two individual policies. However, it typically offers a single payout—generally triggered by the death of the first insured individual—after which the coverage ceases.

This type of insurance is usually most beneficial when your partner is your sole dependent and there are no additional beneficiaries, such as children, who would require a second payout.

Do I need life insurance?

Every parent, partner, or caregiver should reflect on this important aspect. If someone depends on your income and would face financial difficulties in your absence, life insurance can serve as a crucial safety net for them after you’re gone.

Although life insurance isn’t mandatory, mortgage lenders may require you to have a policy before approving your mortgage application. This requirement provides the lender with reassurance that there’s some financial protection in the event of your passing.

Ultimately, the choice is yours to determine if the monthly premium aligns with your financial priorities. Here are some important factors to consider:

• If you don’t have anyone relying on you, purchasing life insurance may not be necessary. There’s no point in securing a policy if you don’t have beneficiaries in mind. Conversely, even if you have dependants, you might not require coverage if your passing wouldn’t significantly affect their financial situation. However, if your loved ones would face difficulties covering expenses in your absence, a life insurance policy can help alleviate that financial strain.
• Verify whether you have any coverage through your employer. If you are employed, you may have complimentary ‘death-in-service’ insurance. This type of coverage usually provides a payout of a multiple of your salary, often around four times, as long as you remain with the company, which may mean you don’t require extra protection.

How much cover do I need?

When considering a life insurance policy, it’s essential to determine the payout amount you would want in the event of your death. While this amount may be influenced by what you can afford in monthly premiums, a common guideline is to aim for coverage that is equivalent to ten times the highest earner’s annual income.

Although this figure might appear substantial, it is typically sufficient to provide for ongoing expenses like mortgage payments and childcare, even after accounting for inflation. Additionally, this payout can help support those left behind, especially if they need to leave their jobs to care for children or relatives.

To assist you in figuring out an appropriate coverage amount, ensure that your policy includes:

• Any outstanding debts that need to be paid off (including mortgages).
• Immediate outgoings your dependants would need to pay.
• Future spending, eg, university costs for the kids.
• Any additional expenses a death may trigger, such as funeral costs.

How long should the policy last?

A policy that protects children should remain in effect until they are no longer dependent on you or your partner, which typically means at least until they complete their full-time education.

If you intend to have additional children, it may be wise to project when that might occur instead of attempting to extend or acquire a new policy later. This is important because the cost of coverage increases as you age.

When it comes to covering a partner, the policy should ideally last until the year you anticipate reaching pensionable age. There’s no need to adhere to a specific number of years; policies can be structured for durations like 17 years, for example.

Can you have more than one life insurance policy?

Absolutely. As time goes by, your situation may evolve; for instance, your debts or living costs could rise. You may have relocated to a pricier residence, or your family size may have increased.

In such situations, it’s wise to reassess your financial situation to ensure that your life insurance remains appropriate. You might need to address any gaps in coverage, either by enhancing your current policy or by purchasing an additional one.

What will affect my life insurance quote?

Insurance companies will provide you with a customized quote tailored to the coverage you seek and the details you share about yourself and any additional policyholders if it’s a joint policy. Typically, this will encompass:

1) Your age. In general, the younger you are, the cheaper cover will be.

2) How much cover you want. The greater the payout you’re looking for, the more it’ll cost.

3) How long you want the cover for. The cost of the policy increases with the length of coverage you desire. Insurers tend to perceive a higher likelihood of a claim as you age.

4) Whether you have any medical conditions. It’s crucial to reveal any medical issues, as failing to do so could void a policy. Certain conditions may result in higher premiums, while others may have little to no effect on your rates.

5) If you want any extra cover added-on. Critical illness is a common add-on. Read our full Critical illness cover guide.

6) How you buy the policy. When buying a property, the mortgage company, bank, or financial advisor at the estate agency may recommend obtaining a type of life insurance. However, you aren’t obligated to go through them; exploring other options could lead you to better or more affordable choices.

When you buy a policy yourself, you’ll have two main routes – Non-advised and Advised. Non-advised is usually cheaper, but you’ll need to know exactly what you want. If you’re not sure, or have medical conditions, an advised route is likely to be the better option.

How much will life insurance cost?

A good practice is to obtain quotes from multiple providers. However, in contrast to car insurance or home insurance, the most affordable life insurance rates typically aren’t listed on standard comparison websites. Generally, the best deals are found through a broker. Avoid selecting a policy solely from your bank or purchasing directly from an insurer, as these options can often be more costly.

When purchasing coverage, you will have two options for your monthly payment:

• Guaranteed – your insurer will never change the price over the life of the policy.
• Reviewable – often cost less at first, but your insurer can hike costs later on, so a cheap deal now may prove costly in the long term.

The following table illustrates the variations in prices for identical coverage levels, depending on the source of the policy. These figures (guaranteed throughout the term) serve as examples—based on a hypothetical 30-year-old non-smoker without any medical issues—so your actual personalized prices may vary significantly.

How life insurance costs can differ depending on how you buy

(1) Prices based on 30-year-old non-smoker.  (2) Prices correct as of November 2023.
(3) Prices correct as of March 2023.  (4) When you purchase online, with no advice

How to buy life insurance

In the scenario we discussed, purchasing life insurance through a broker may be the most economical option. However, it’s important to consider whether you require guidance in selecting the right policy, as the least expensive option may not necessarily suit your needs best. Therefore, you should weigh these two alternatives:

• Non-advised route – it’s often most effective when you have a clear idea of your needs. In this case, you won’t require detailed policy explanations and will be focused on finding the lowest possible price.
• Advised route – if you’re uncertain about the type of policy that suits your needs, have existing medical conditions, or wish to consult with a specialist, they will conduct a comprehensive evaluation of your financial and medical circumstances to identify the most suitable policy for you.

Cheapest ‘non-advised’ brokers – if you know what you want

If you’re knowledgeable about life insurance, using a specialist discount broker can be an excellent option. This method is the most cost-effective for purchasing life insurance, but it does require you to have a clear understanding of the type of policy you want.

Typically, you can obtain a policy through these brokers for a fee of £25. They pass on all the commissions they receive from the insurer back to you, effectively giving you a discount—hence the term “discount broker.” Although there is an upfront fee, this approach can save you thousands of pounds over the duration of the policy.

Here are some of the brokers we’ve identified as the most affordable, with positive reviews. We recommend exploring as many options as your schedule allows.

• Cavendish Online
• Moneyworld
• Money Minder

Important. Before purchasing from any of these companies, it’s important to clarify whether you’re receiving ‘advice’ or merely ‘information.’ If you’re being advised, they are required to conduct a comprehensive assessment of your financial and medical situation as well as your insurance requirements before recommending policies, which may result in higher costs.

Cheapest ‘advised’ brokers – if you need help choosing

During our evaluation of various brokers, we found that there wasn’t a single provider that consistently offered the lowest premiums. Therefore, we recommend obtaining quotes from as many of these companies as your schedule allows. The brokers are listed alphabetically, but don’t interpret this as a specific order for contacting them; our findings indicated that different brokers could provide the best rates depending on the situation.

Some brokers do provide vouchers or cashback offers. While it’s important to take these into account in your calculations, they shouldn’t be the sole deciding factor. For instance, if a broker with a voucher quotes you a premium that is only £1 more per month than a comparable policy from another provider, over a 25-year period, you’d end up paying an additional £300 for that policy, which isn’t worth it for a £100 voucher.

Additionally, consider the three brokers mentioned in the ‘non-advised’ section above. Although they typically offer advised policies, the decision may not solely hinge on cost. You might prefer one broker’s approach over another’s, so it’s important to consider the quality of service they provide as well.

Advised brokers to try (in alphabetical order)

Struggling to find cover?

If you’re having difficulty locating coverage and the companies mentioned earlier couldn’t assist you, or if you prefer to connect with a local provider, visit the British Insurance Brokers Association website and utilize their ‘Find insurance’ feature. Be sure to choose ‘Life insurance’ when prompted about the type of insurance you’re seeking.

How to complain about your insurance provider

The insurance sector often struggles with a negative perception regarding its customer service. Additionally, while some individuals may have a positive experience with a provider, others can find it incredibly frustrating.

Frequent issues include delays in claim payments or outright denials, hidden fees, and exclusions buried in fine print. It’s advisable to reach out to your provider directly first, but if that doesn’t yield results, you have options…

Consider utilizing the free complaint tool Resolver. This resource assists you in organizing your complaint, and if the company is unresponsive, it can help you escalate the matter to the complimentary Financial Ombudsman Service.

Life insurance FAQs

Q – What is the benefit of putting my policy ‘in trust’?

A – When you pass away with an active life insurance policy, the benefits typically become part of your estate, which can result in a substantial Inheritance Tax burden. However, you can often avoid this issue by placing the policy in trust at the time of its creation.

By putting the policy in trust, the insurance benefits are paid directly to your beneficiaries, keeping them outside your estate. This not only helps you avoid Inheritance Tax but also often accelerates the payout process.

Most insurance policies offer an option to write them in trust without any additional cost, making it a straightforward process. However, it’s important to be aware that there are various types of trusts, and altering or canceling them can be challenging, even with the consent of all beneficiaries. Therefore, consider carefully who will receive the payout.

If you have the expertise, you can write the policy in trust on your own. Otherwise, it’s advisable to consult with a reputable advisory broker or refer to our guide on Independent Financial Advisers for assistance.

Q – What do I need to disclose to an insurer?

A – It’s crucial to be transparent and honest with the information you share when seeking a policy. This ensures that the policy is tailored to your needs and provides adequate coverage in case your dependents need to file a claim in the event of an unforeseen circumstance.

When obtaining a policy quote, you will likely need to share details such as your age, smoking status, occupation, and health history. Insurers utilize this information to evaluate your eligibility for coverage and to determine pricing.

If you’re comparing quotes independently through a discount broker, you may initially answer a few simple questions to receive preliminary prices. However, if you proceed to apply directly with the insurer, you’ll be required to provide more extensive information, which could influence both the cost and the insurer’s decision regarding your coverage.

Since each insurer has different policies regarding pre-existing medical conditions, it’s advisable to seek guidance if you have a complex medical history. Brokers are particularly knowledgeable about which insurers may accept your condition(s) and can help you find the best rates.

For individuals aged 50 and older who prefer not to disclose health information, an over-50 policy could be a viable option. These policies do not require health questions or medical exams and guarantee acceptance up to age 80 or 85. However, they tend to be significantly more expensive, often include a waiting period of one to two years before claims can be made, and may result in receiving less than the total premiums paid.

For comprehensive information and important considerations, refer to our Over-50s’ Life Insurance guide.

Q – Can I switch policies to try and save (eg, if I’ve now quit smoking)?

A – The straightforward response is affirmative: you can seek out another policy, potentially at a lower cost. However, since life insurance tends to become pricier as you grow older, achieving savings may not always be feasible.

That said, obtaining a quote can be beneficial, particularly if any of the following circumstances apply:

• If you obtained your policy directly from a bank or insurer and your health status remains mostly the same, there might be potential savings by exploring other options. If you secured your policy through a bank or an insurer without comparing multiple quotes, you could likely benefit from switching policies. It’s always a good idea to request new quotes for comparison. If the new quotes indicate possible savings (ensure that the coverage is equivalent), simply arrange the new policy. Once it’s active, you can proceed to cancel your current policy.
• If you’ve stopped smoking or left a high-risk job, you may qualify for lower insurance rates. Non-smokers typically enjoy significantly reduced premiums compared to smokers, as they have a lower risk of mortality during the policy period. To be classified as a non-smoker, you usually need to have been completely free of nicotine for at least one year, though some insurers may require you to be nicotine-free for up to five years, so it’s essential to verify this.

After a year of quitting, consider obtaining a new insurance quote to explore potential savings. However, it’s crucial not to misrepresent your smoking status. If you pass away and it’s revealed that you were a smoker, it could lead to the policy being voided. If you are truly committed to quitting, it’s wise to have this documented in your medical records to support any future claims.

Q – What do I do if the insurer goes bust?

A – Life insurance coverage functions similarly to home, car, travel, or pet insurance. In the event that a provider fails, the Financial Services Compensation Scheme (FSCS), backed by the government, provides support.

It offers protection in two primary ways:

• When you need to file a claim with an insurer that has gone bankrupt, the primary goal of the FSCS is to ensure ‘continuity’. In the event of your insurer’s failure, the FSCS will either seek a new provider to assume your policy or issue an alternative policy. If you have any active claims or need to submit a claim while waiting for a new insurer, the FSCS will provide coverage for these situations.
• If your broker were to go bankrupt, the primary fee you would likely owe is for the policy arrangement, typically around £25 if you utilized a discount broker.Should your broker collapse after you’ve paid the fee but before your insurance is secured, the likelihood of recovering that fee is quite low.

The Financial Services Compensation Scheme (FSCS) can assist with any premiums that are lost due to a broker’s insolvency, as these payments are protected. However, this assistance generally does not cover broker fees.

It’s important to understand that non-mandatory insurance policies—like those for life, home, travel, and pets—typically cover 90% of the premiums paid. This means that, in the worst-case scenario, you might end up losing only 10% of what you’ve invested. However, it’s more common for policyholders to be switched to a different insurer.