Life insurance can be a financial safety net that helps to provide peace of mind and security for your loved ones after you're gone. For many people in the UK, life insurance can be an important way to ensure that their partner, children, or other loved ones receive some financial support when they are no longer around, so they’re not burdened by unexpected costs. This guide explains how life insurance works, the factors that influence the cost of a policy, and how to decide if it’s the right choice for you.
How life insurance works in the UK
Life insurance is a simple way to help put some financial protection in place for your loved ones. A life insurance policy is a contract between you and an insurance provider. In exchange for regular payments (known as premiums), the provider agrees to pay a lump sum to your chosen beneficiaries when you pass away. This lump sum payout can help cover funeral expenses, outstanding debts, or it could simply be left as a gift for your family.
There are two main types of cover – whole of life insurance and term life insurance. Whole of life insurance is taken out and stays in place for the rest of your life. Term life insurance lasts for a specific term, this may be 10, 20 or 30 years usually, but it can vary between insurers.
For seniors, a whole of life policy is often the more popular option. Unlike term life insurance, which only pays out if you pass away within a specified period, whole of life insurance guarantees a payout whenever you die, as long as you keep up with your premium payments.
How much does life insurance cost?
The cost of life insurance depends on a few key factors:
- Age – Generally, the older you are when taking out a policy, the higher your premiums.
- Health – Poor health and family medical history can affect your premiums.
- Lifestyle – Risky hobbies or occupations (such as extreme sports or hazardous work environments) may lead to higher costs.
- Amount of Cover – The higher the payout amount, the more expensive the premiums.
- Policy Type – Whole of life policies tend to be more expensive than term policies, but they guarantee a payout.
- Smoking Status – Smokers often pay more due to the associated health risks.
Things to consider before getting life insurance
Before deciding on a policy, think about the following:
Do you have dependents?
If you have children, a spouse, or others who rely on your income, life insurance can help them financially after you pass away.
Do you have savings?
If you have significant savings or assets, your family may not need a life insurance payout.
Funeral costs
The average funeral in the UK can cost over £5,000. A life insurance payout can help cover this expense, preventing financial stress for your loved ones.
Outstanding debts
If you have a mortgage or personal loans, life insurance can ensure these are settled.
How to decide how much cover you need
Choosing the right amount of life insurance depends on your personal circumstances.
Consider:
Funeral expenses
With funerals costing around £5,000 in the UK, you may want to consider a policy that provided a benefit of £5,000 or more.
Outstanding debts
If you have remaining mortgage payments or personal loans, add these to your desired cover amount.
Family needs
If you want to leave money for children or grandchildren, think about how much they may need for financial security.
Inflation
The value of money decreases over time, so consider adding extra coverage to account for rising costs.
Some insurers offer fixed coverage (which stays the same over time) or increasing coverage (which adjusts for inflation). Increasing coverage usually costs more but helps maintain the value of the payout.
What can the payout be used for?
When the policyholder passes away, the beneficiaries can use the lump sum payout for a variety of purposes, including:
Funeral and burial costs
Helps cover the rising cost of funerals and cremations.
Settling debts
Pays off mortgages, personal loans, or other outstanding bills.
Living expenses for a spouse or family
Provides a financial cushion for a surviving spouse or dependent family members.
Gifting to family or charities
Leaves a legacy for loved ones or a favourite charity.
Inheritance Tax planning
If the payout is placed in a trust, it can help reduce the inheritance tax burden on your estate.
Whole – of life insurance
For seniors, whole of life insurance is often a popular option because it guarantees a payout. While premiums are higher than term life policies, the certainty of cover staying in place for the years to come can make it a valuable investment.
Many providers offer Over 50s Life Insurance, which is specifically designed for seniors. These plans often have guaranteed acceptance with no medical exams, making them ideal for those with pre-existing health conditions. However, they usually have a waiting period of around 12 months or more, during which the full payout won’t be available if you pass away from natural causes.
Is life insurance right for you?
If you have dependents, outstanding debts, or wish to cover funeral expenses, a whole of life policy can provide some peace of mind.
When choosing a policy, you may want to consider factors like your age, health, and the level of cover needed. Comparing different providers and policy options can help you find a plan that fits your needs and budget.
Planning ahead can help ensure that your family is protected and that you leave behind a secure financial legacy.