Life insurance: everything (sort of) you’ve always wanted to know but were afraid to ask

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If you've ever had a question about life insurance - what it is, and how much it might cost - you're in the right place.

You’re in the right place. Here, we break down, in no particular order, everything you’ve always wanted to know about life insurance but were afraid to ask.

Life insurance is often thought about as something only rich people need to worry about, but that’s a bit of a myth. Most people feel and understand the need to protect their loved ones when they die. A life insurance policy can be one of the best ways to do that.

How does life insurance work, exactly?

Simply put, life insurance is a financial product that helps you to leave behind money for your family if you die while covered. The money could then be used to support them in a variety of ways. It can replace the regular income they will lose when you pass away, or could go towards paying off a large debt such as your mortgage.

More about life insurance.

How much does life insurance cost?

There are many factors that go into calculating how much your life insurance costs. For example, going via a financial adviser who would draw up a personalised plan for you, or by going direct with a provider. How much you pay also depends on the type of life insurance you take out and how long you take out cover for (for example, 25 years). Consequently, your life insurance payments can range from about £10 a month to few hundred.

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How do you claim?

The process is different for life insurance providers. But generally, they follow these steps:

  1. The policy owner dies
  2. The family or beneficiaries contact the insurance company
  3. The insurance companies guide them through what is needed to pay out the money to the beneficiaries.

How long this process depends on how straightforward or complex the claim is.

What are the different types of life insurance?

There are various types of life insurance to choose from, so if you’re applying directly with an insurance provider, it’s important to select the most suitable one for your circumstances. If you’re going via financial adviser, they can guide you through this process. Whichever route you take, your age, health, lifestyle and how much cover you need will all determine how much you pay.

Level term life insurance cover

Level term insurance is probably the most common and the most straightforward type of life insurance. It lets you choose the amount you want to be insured for and how long you want the cover to last. If you die within the term, the policy pays out to your loved ones. If you survive the policy, your money will not be returned. The amount you're covered for remains the same throughout the term.

To give an example, you might set a level term life insurance policy at 20 years with an £80,000 payout. This would mean that if you died at any time during that 20-year term, your loved ones would receive £80,000. It doesn't matter if you die after the first year or in the last year of the policy. The payout would be the same.

Decreasing term life insurance cover

With decreasing term life insurance (also known as mortgage life insurance), the amount you’re covered for decreases over the term of your policy. Your monthly payments remain the same, so you know exactly what you are paying each month. Typically, these policies are used to cover a debt that reduces over time, such as a repayment mortgage.

Critical illness insurance

Critical illness cover can be sold on its own, as an optional extra alongside life insurance. It’s meant to help your family in the event you develop a serious health issue. If you are diagnosed with a critical illness defined in your policy, your family could receive a lump sum payment.

If I’m single, do I need life insurance?

If you’re a single parent, your life insurance could pay towards your children’s upkeep.  As well as their everyday needs, a life insurance payout could help with university costs, driving lessons or even money towards a deposit on their first home.

Life insurance can also be used to clear any outstanding debts you may have, including your mortgage, and towards some of your funeral costs.

However, bear in mind that a life insurance payout could affect their eligibility for means-tested benefits.

If I’m single with no children, what’s the point of taking out life insurance?

If you’re single, you may think you don’t need life insurance, but there are times when it’s a good idea. For example, by taking out a plan to cover the cost of your funeral, and reduce what could be a five-figure burden on your loved ones.

Similarly, life insurance such as income protection or critical illness can give you financial support when you need it the most.

Isn’t it better to set money aside for savings rather than buy life insurance?

Putting money aside for a rainy day is different from buying life insurance as they cater for different circumstances. Think of term life insurance as a practical addition of a wider financial plan. With a level term policy, cover starts immediately for the full amount of the policy.

So if, for example, you took out £80,000 cover, your family would be covered immediately for that amount. Most savings accounts are designed for rainy days like fixing a broken down boiler or car, and probably wouldn’t offer your family the same level of financial protection as life insurance would, in the event of your death.

If you thought that life insurance was only for rich people, think again. With the range of cover available, your family can be protected and have money to help with them with bills and other living expenses in the event of your death.

Is it true that life insurance companies don’t like paying out to beneficiaries?

In 2020, 98% of insurance claims were paid, a figure unchanged from 2019. Despite this, there is still a misconception that insurance companies don’t pay out. In cases where they don’t, it’s usually due to irregularities at the point of application, for example, downplaying or omitting a medical condition.

Life insurance aims to financially protect your loved ones if you pass away while covered. If you’re thinking of taking out a plan, make sure you discuss your concerns with your intended provider or adviser before getting your policy. Legitimate providers and advisers are registered with the Financial Conduct Authority, so you can be sure that you’re getting the right advice and product for you.

I’m 50. Am I too old for life insurance?

The maximum age for getting term life insurance can vary between insurers. Some will only insure up to 70 years whilst others may insure you up until you are 90. It will also depend on the type of life insurance you are looking for. So, whether you’re 50, 60 or 70, chances are that there’s a life insurance plan for you if you think you are too old.

Can I take out life insurance on my parents without their permission?

No, you would need their permission and most insurers would want to see a medical report from the insured person.

Check out the types of life insurance available to you.