TL;DR
Life insurance. It’s a term we all hear, often filed away in the “I’ll get to it later” part of our minds. But what if later is too late?
Key takeaways
- Your spouse or civil partner, especially if they earn less than you or do not work.
- Your children, who depend on you for everything from housing and food to their future education.
- Ageing parents you may be supporting financially or providing care for.
- A sibling or other relative with a disability who relies on you.
- Utility bills
Life insurance. It’s a term we all hear, often filed away in the “I’ll get to it later” part of our minds. But what if later is too late? For many, the question isn’t what it is, but whether they actually need it. The world of financial protection can seem like a dense forest of jargon, complex products, and confusing choices.
That’s where this guide comes in. Forget the complexity. We’re going to walk you through a simple, step-by-step decision tree. Think of it as an interactive flowchart for your life. By answering a series of straightforward questions, you’ll gain a crystal-clear understanding of whether life insurance, or another form of protection, is the right fit for you.
WeCovr’s decision-tree guide helps you decide whether life insurance fits your needs
At its heart, life insurance is a promise. It's a contract between you and an insurer that promises to pay out a tax-free cash sum to your loved ones if you pass away during the policy's term. This financial safety net can be the difference between your family maintaining their lifestyle and facing financial hardship during an already devastating time.
Let’s start at the very first, and most important, question on our decision tree.
The First Branch: Do You Have Financial Dependants?
This is the foundational question. A financial dependant is anyone who relies on your income to support their life.
Think about:
- Your spouse or civil partner, especially if they earn less than you or do not work.
- Your children, who depend on you for everything from housing and food to their future education.
- Ageing parents you may be supporting financially or providing care for.
- A sibling or other relative with a disability who relies on you.
If your answer is YES, I have financial dependants... You are the primary candidate for life insurance. Your income is a pillar supporting your family’s entire world. If that pillar were to disappear, the financial consequences could be immediate and severe. Let's explore the branches that stem from this "yes."
Protecting Your Legacy: Covering Mortgages and Major Debts
For most UK families, the mortgage is the single largest financial commitment. According to the Office for National Statistics, the average outstanding mortgage debt for UK households with a mortgage hovered around £145,000 in recent years.
Imagine your family having to find that money, on top of grieving, just to keep their home.
Life insurance, specifically Decreasing Term Insurance, is designed for this. The payout amount decreases over time, roughly in line with your remaining mortgage balance. It's an affordable way to ensure the keys to your family home are well and truly theirs, no matter what.
But it’s not just mortgages. Consider other debts:
| Type of Debt | How Life Insurance Helps |
|---|---|
| Mortgage | Pays off the outstanding balance, securing the family home. |
| Personal Loans | Clears loans for cars, home improvements, or consolidation. |
| Credit Card Debt | Prevents outstanding balances from eating into your estate. |
| Business Loans | Protects your family and business partners from liabilities. |
A Level Term Insurance policy, which pays out a fixed lump sum, can be used to clear all of these debts, providing a clean financial slate for your loved ones.
Securing Their Future: Replacing Your Lost Income
Beyond the mortgage, how would your family manage day-to-day costs without your salary?
- Utility bills
- Food shopping
- Childcare costs
- School uniforms and trips
- Car running costs
- Saving for the future
A life insurance lump sum can be invested to provide an income, but there's another clever option: Family Income Benefit.
Instead of a single large payout, this policy pays your family a regular, tax-free monthly or annual income for the remainder of the policy term. This can feel more manageable than a large lump sum and directly replaces your lost salary, making budgeting simpler during a difficult period.
Example: Mark is 35 with two young children. He wants to ensure his family is supported until his youngest child turns 21. He takes out a 16-year Family Income Benefit policy that would pay his family £2,500 every month if he were to pass away. It’s a predictable, steady income stream they can rely on. (illustrative estimate)
Beyond the Basics: Funding Future Goals and Inheritance Tax
Life insurance isn’t just about covering the essentials; it’s about preserving the dreams you have for your family. A lump sum payout can ensure that:
- Your children can still go to university without taking on huge student debt.
- You can contribute to a deposit for their first home.
- A dream wedding can still be funded.
Furthermore, if you have a sizeable estate, you may need to plan for Inheritance Tax (IHT). In the 2024/25 tax year, the threshold (nil-rate band) is £325,000 per person. Assets above this could be taxed at 40%. (illustrative estimate)
A Whole of Life insurance policy, written 'in trust', can be a powerful tool here. The payout is specifically used to cover the IHT bill, ensuring the legacy you want to pass on to your children remains intact. Another specialist product is Gift Inter Vivos insurance. If you gift a large sum of money or an asset, it may still be considered part of your estate for IHT purposes if you pass away within seven years. This type of policy covers that potential tax liability, protecting the recipient of your gift.
If your answer is NO, I do not have dependants... You might be thinking, "Great, I'm off the hook!" Not so fast. While the need is less immediate, there are still compelling reasons to consider protection. Let's head down this path of the decision tree.
Navigating Life Without Dependants: Is Life Insurance Still Relevant?
Even without dependants, your death could still create financial complications for others or leave unfulfilled wishes.
Clearing the Slate: Covering Your Own Debts
Do you have a mortgage with a partner, even if they aren't a dependant? If so, they would become solely responsible for the entire repayment. A life insurance policy could pay off your half, relieving them of a huge financial burden.
Even sole debts don't just vanish. Lenders can make a claim against your estate—everything you own, from your property to your savings. A modest life insurance policy can ensure these debts are settled without wiping out the value of assets you might want to leave to family or friends. A key consideration is covering your funeral costs. The SunLife Cost of Dying Report consistently shows that the average UK funeral costs thousands of pounds (£4,000 - £5,000 is a realistic range). A small policy can prevent this expense from falling on your parents or siblings.
Leaving a Legacy: Gifts to Family, Friends, or Charity
Perhaps you don’t have children, but you’d love to help your favourite niece or nephew with a deposit for their first home. Or maybe you're passionate about a particular charity. Life insurance is one of the most cost-effective ways to leave a significant, guaranteed, and tax-free cash gift. For a small monthly premium, you could leave a legacy of £50,000 or £100,000 that could make a world of difference. (illustrative estimate)
Protecting Your Business: Key Person and Shareholder Protection
This is a critical area, especially for entrepreneurs. If you are a company director or business owner, your value extends far beyond your personal life.
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Key Person Insurance: Is your business's success heavily reliant on you or another key employee? What would happen to profits, client relationships, or supplier confidence if that person were to die suddenly? Key Person Insurance is taken out by the business to provide a cash injection. This buys the company time to recruit a replacement, cover lost profits, and reassure stakeholders.
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Shareholder or Partnership Protection: If you own a business with others, what happens to your shares if you die? Typically, they pass to your beneficiaries via your will. Do they want to run a business? Do your partners want them involved? This can create a messy and difficult situation. Shareholder Protection provides the surviving partners with the funds to buy the deceased's shares from their estate, ensuring a smooth transition of ownership and business continuity.
What if I Don't Die, But Can't Work Due to Illness or Injury?
Our decision tree so far has focused on death. But what happens if a serious illness or injury strikes, and you survive but are unable to earn an income? For many, this is a far more likely and financially crippling scenario.
Recent statistics from Cancer Research UK show that 1 in 2 people in the UK will be diagnosed with some form of cancer during their lifetime. The British Heart Foundation reports millions of people living with heart and circulatory diseases. These events don't just impact your health; they can destroy your finances. This is where we need to add two more crucial branches to our protection plan. (illustrative estimate)
The Critical Illness Safety Net: A Lump Sum When You Need It Most
Critical Illness Cover (CIC) is designed to pay out a tax-free lump sum if you are diagnosed with one of a list of specific, serious conditions defined in the policy (e.g., specific types of cancer, heart attack, stroke, multiple sclerosis).
This money is yours to use however you need it. You could:
- Clear your mortgage or other debts, reducing your financial outgoings.
- Pay for specialist private medical treatment not available on the NHS.
- Adapt your home (e.g., install a wheelchair ramp).
- Replace lost income while you focus on recovery.
- Allow your partner to take time off work to care for you.
CIC is often sold as a combined policy with life insurance (Life and Critical Illness Cover). It provides a comprehensive safety net that covers you for both death and serious illness.
Your Monthly Paycheque, Protected: The Power of Income Protection
Income Protection (IP) is arguably the one policy every working adult should consider. It’s the foundation of any financial protection plan.
Unlike CIC, which pays a lump sum for a specific condition, IP pays you a regular, tax-free monthly income if you are unable to work due to any illness or injury. It continues to pay out until you can return to work, the policy term ends, or you retire—whichever comes first.
Think about it. Your ability to earn an income is your single most valuable asset. What's your backup plan if it stops? Statutory Sick Pay (SSP) in the UK provides a minimal safety net (around £116 per week in 2024/25) for a maximum of 28 weeks. For most people, this is nowhere near enough to cover their essential outgoings. (illustrative estimate)
Income Protection bridges that gap, providing you with up to 60-70% of your gross salary. It ensures you can still pay the bills and maintain your lifestyle while you focus on getting better.
For company directors, Executive Income Protection is a highly tax-efficient alternative. The business pays the premiums, which are typically an allowable business expense, yet the benefit is paid to the employee (the director) without being taxed as a P11D benefit.
Short-Term Cover for Hands-On Professionals: Personal Sick Pay
For some, particularly those in riskier, manual jobs like tradespeople, electricians, or plumbers, a full Income Protection policy might seem too expensive or complex. This is where Personal Sick Pay insurance comes in.
It's a type of short-term income protection. It's designed to be more affordable and straightforward, paying out for a fixed period, typically 1, 2, or 5 years per claim. The 'deferment period' (the time you have to be off work before the policy starts paying) is often shorter, making it ideal for self-employed individuals who feel the financial pinch of being off work almost immediately.
Your Life, Your Policy: Tailoring Protection to Your Circumstances
There is no one-size-fits-all solution. The right protection for you depends entirely on your age, health, profession, and financial situation.
For the Young & Healthy: The Best Time to Start?
It’s a common misconception to wait until you have a mortgage and children to think about protection. The truth is, the best time to get it is when you are young and healthy.
Why? Because premiums are calculated based on risk. The younger and healthier you are, the lower the risk to the insurer, and therefore the lower your monthly premiums. By taking out a policy in your 20s or early 30s, you can lock in an incredibly low rate for the entire term of the policy, often 30 or 40 years. It's one of the smartest financial moves you can make for your future self.
At WeCovr, we not only help you find the most competitive rates but also believe in proactive wellness. That's why our clients get complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app. It's our way of helping you stay healthy, which is good for your wellbeing and your wallet.
For Company Directors & Business Owners: Protecting Your Enterprise
As a business owner, you have a dual responsibility: to your family and to your business. A robust protection strategy is not a luxury; it's a core component of your business continuity plan.
| Business Protection Product | Who It's For | What It Does |
|---|---|---|
| Key Person Insurance | Businesses reliant on 1-2 crucial individuals. | Provides a cash lump sum to the business to cover lost profits and recruitment costs if a key person dies or becomes critically ill. |
| Shareholder Protection | Limited companies with multiple shareholders. | Provides funds for surviving shareholders to buy the deceased's shares from their estate, ensuring smooth ownership transfer. |
| Executive Income Protection | Company directors and key employees. | A tax-efficient policy paid for by the business to provide a monthly income to an employee who is unable to work. |
For the Self-Employed & Freelancers: Creating Your Own Safety Net
When you're self-employed, you are your own HR department. There's no employer-provided sick pay, no death-in-service benefit, and no company pension. You have to build your own safety net from scratch.
- Foundation: Income Protection is non-negotiable. It's your replacement sick pay scheme, protecting your income against any illness or injury.
- Debts & Family: Life Insurance is essential to cover personal and business loans and provide for your family, just as it would for an employee.
- Serious Illness: Critical Illness Cover can provide a vital cash injection to keep your business afloat and cover personal costs if you're diagnosed with a major health condition.
Calculating Your Coverage: From Guesswork to a Clear Figure
"How much cover do I need?" is the next logical question. A common rule of thumb is "10 times your annual salary," but a more tailored approach is far better. A simple way to get a more accurate figure is to think in terms of D-I-M-E.
- Debts: Add up your mortgage, personal loans, car finance, and credit card balances.
- Income: Multiply your annual take-home pay by the number of years you want to provide for your family (e.g., until your youngest child is 21).
- Mortgage: This is already covered under 'Debts' but it's the most important one to list.
- Education & End-of-Life: Add estimated future costs like university fees for your children (£30,000 - £50,000 per child is a common planning figure) and funeral costs (approx. £5,000).
Example Calculation:
| Category | Amount |
|---|---|
| Debts (Mortgage) | £200,000 |
| Income Replacement (£40k x 15 years) | £600,000 |
| Major Future Costs (Uni for 2 kids) | £80,000 |
| End-of-Life (Funeral) | £5,000 |
| Total Cover Needed | £885,000 |
This figure might seem large, but a specialist broker like WeCovr can help you find affordable ways to structure this cover, perhaps using a combination of different policies.
How WeCovr Simplifies Your Protection Journey
Navigating this landscape alone can be daunting. As expert independent brokers, our job is to make it simple.
- We're on your side: We are not an insurance company. We work for you, not the insurer.
- Whole-of-market access: We compare plans and prices from all the major UK insurers to find the policy that perfectly matches your needs and budget.
- Expert guidance: We help you understand the fine print, from filling out the application to the critical step of placing your policy in trust to ensure the payout is fast, efficient, and tax-free.
- A focus on wellbeing: We go beyond the policy. Our commitment to your health is shown through our complimentary CalorieHero app, helping you build a healthier future.
Making a decision about protection is a profound act of responsibility and care. Let us help you get it right.
A Healthier You: Lowering Your Premiums and Living Better
Insurers are in the business of risk. It follows that the healthier you are, the less of a risk you pose, and the lower your monthly premiums will be. Making positive lifestyle changes can have a significant impact on the cost of your cover.
- Smoking & Vaping: This is the single biggest factor. A smoker can expect to pay double, sometimes even triple, the premium of a non-smoker for the same amount of cover. Most insurers require you to be nicotine-free (including patches and gums) for at least 12 months to be classified as a non-smoker.
- Alcohol Consumption: Insurers will ask about your weekly unit consumption. Staying within the NHS recommended guidelines (no more than 14 units per week) will help you secure standard rates.
- Body Mass Index (BMI): A BMI within the healthy range (18.5 to 24.9) is looked upon favourably. A very high BMI can lead to increased premiums or even exclusions.
- Diet & Exercise: While insurers don't ask for your gym schedule, a healthy lifestyle reduces the risk of developing conditions like heart disease and type 2 diabetes, which are key factors in underwriting. Following NHS guidelines of 150 minutes of moderate-intensity activity per week is a great goal.
Your Decision, Your Peace of Mind
We’ve walked through the decision tree, from dependants and debts to illness and business protection. By now, you should have a much clearer picture of where you stand.
Life insurance isn't for everyone. But for millions of people across the UK, it is the fundamental bedrock of financial security. It provides peace of mind, knowing that if the worst should happen, the people you love will be protected from financial hardship.
The journey doesn’t stop with life insurance. A truly robust plan considers the "what ifs" of life, incorporating Critical Illness Cover and Income Protection to safeguard you and your family against all eventualities.
The most important step is the first one. Don't leave it to chance. Don't put it off until "later". Explore your options, understand the costs, and put a plan in place. It's one of the most lasting and meaningful gifts you can ever give your family.
Is the payout from a life insurance policy taxable?
Can I get life insurance if I have a pre-existing medical condition?
What is the difference between 'level term' and 'decreasing term' life insurance?
- Level Term Assurance: The payout amount remains fixed for the entire term. If you take out £200,000 of cover for 25 years, it will pay out £200,000 whether you pass away in year 1 or year 24. This is best for covering family living costs or an interest-only mortgage. (illustrative estimate)
- Decreasing Term Assurance: The payout amount reduces over time, usually in line with a repayment mortgage. It's designed so that the payout is always enough to clear the remaining mortgage balance. Because the insurer's liability decreases, these policies are cheaper than level term cover.
Can I have more than one life insurance policy?
Does life insurance pay out for suicide?
Sources
- Office for National Statistics (ONS): Mortality, earnings, and household statistics.
- Financial Conduct Authority (FCA): Insurance and consumer protection guidance.
- Association of British Insurers (ABI): Life insurance and protection market publications.
- HMRC: Tax treatment guidance for relevant protection and benefits products.
