How Does Life Insurance Work in the UK

Life insurance is one of the most important financial products you can buy, yet it remains a subject shrouded in mystery and misconception for many. What exactly is it? How does the process unfold, from the initial questions on an application form to the final payout your loved ones might receive? And with so many different types of cover available, how do you know which one is right for your unique circumstances?

This guide is designed to demystify life insurance in the UK. We will walk you through the entire journey, step by step, providing the clarity you need to make informed decisions about protecting your family's financial future.

WeCovr explains life insurance from application to payout

At its heart, life insurance is a simple contract. You agree to pay a regular amount of money (a 'premium') to an insurance company. In return, the insurer promises to pay out a tax-free lump sum or a regular income if you pass away during the term of the policy.

Think of it as a financial safety net. It’s not for you, but for the people you leave behind. This payout can help them manage essential expenses at a difficult time, such as:

• Paying off a mortgage or other large debts
• Covering everyday living costs like bills, food, and childcare
• Funding future expenses like university fees
• Illustrative estimate: Covering funeral costs, which average around £4,141 in the UK according to the SunLife Cost of Dying Report 2024.

Understanding the mechanics of how this works is crucial. Let's break down the three distinct stages of a life insurance policy's lifecycle.

Stage 1: The Application - Building Your Policy

This is where your journey begins. It's the information-gathering phase, where the insurer assesses the level of risk they are taking on by insuring you.

Getting a Quote

Your first step is to get an idea of the cost. You can go directly to an insurer, but using an independent expert broker like WeCovr has significant advantages. We can compare policies and prices from all the major UK insurers in one go, saving you time and ensuring you see a full market view. This helps you find not just the cheapest policy, but the best value policy for your specific needs.

The Application Form

Once you choose to proceed, you'll complete a detailed application form. The questions are personal, but they are essential for the insurer to accurately calculate your premium. Be prepared to answer questions about:

• Your Personal Details: Age, gender, and contact information.
• The Cover You Want: The amount of cover (the 'sum assured') and the length of the policy (the 'term').
• Your Health: Your height, weight (BMI), and any pre-existing medical conditions like diabetes, heart conditions, or cancer. You'll be asked about treatments, medications, and dates.
• Your Lifestyle: The application will ask if you smoke or use nicotine products, how many units of alcohol you drink per week, and if you have ever used recreational drugs.
• Your Occupation: Some jobs are considered higher risk than others (e.g., a scaffolder vs. an office administrator).
• Your Family's Medical History: You may be asked if your close relatives (parents, siblings) have suffered from serious hereditary conditions like heart disease or certain cancers before a certain age (usually 65).

Crucially, you must be completely honest. This is governed by the principle of 'fair presentation'. Withholding or misrepresenting information, even accidentally, is known as 'non-disclosure' and could lead to your policy being cancelled or a future claim being rejected.

Underwriting: The Insurer's Assessment

This is the behind-the-scenes process where the insurer's underwriters review your application. For many young, healthy applicants, the policy can be accepted immediately based on the application form alone. This is known as being accepted on 'standard terms'.

However, in some cases, the insurer will need more information:

• GP Report (GPR): They may ask for your permission to write to your GP for a report on your medical history. This is common if you've disclosed a medical condition.
• Nurse Screening: An insurer might arrange for a nurse to visit you at home to take basic measurements like your blood pressure, cholesterol levels, and a urine sample.
• Full Medical Examination: In rare cases, for very large amounts of cover or complex medical histories, you might be asked to attend a full medical exam with a doctor.

The underwriting process determines your final premium. If you have a health condition or a high-risk lifestyle, your premium may be 'rated' (increased), or a specific 'exclusion' might be added to your policy.

Stage 2: The Policy is Live - Maintaining Your Cover

Once your application is accepted and you've agreed to the terms, your policy becomes 'in-force'.

Paying Your Premiums

You will start paying your monthly or annual premiums, usually via Direct Debit. It is vital to maintain these payments. If you miss a payment, insurers typically offer a 'grace period' of 30 days to catch up. However, if payments lapse beyond this, your cover will cease, and you will not be eligible for a payout.

Putting Your Policy 'in Trust'

This is one of the most important and often overlooked aspects of life insurance. Writing your policy 'in trust' is a simple legal arrangement that separates the policy payout from your legal estate.

Most insurers offer a standard trust form that is free and simple to complete when you take out your policy. An expert adviser can guide you through this process to ensure it's done correctly.

Reviewing Your Cover

Life insurance is not a 'set it and forget it' product. Your protection needs will change over time. It's wise to review your policy after major life events, such as:

• Getting married or entering a civil partnership
• Buying a new home or increasing your mortgage
• The birth of a child
• A significant salary increase
• Starting your own business

Reviewing your cover ensures your family remains adequately protected as your life evolves.

Stage 3: The Claim - When the Policy is Needed Most

This is the moment of truth, the reason you took out the policy in the first place. The good news is that the vast majority of claims are successful. In 2023, the Association of British Insurers (ABI) reported that 97.3% of all life insurance claims were paid out, totalling an incredible £4.13 billion.

How to Make a Claim

The claim is usually made by the policy's beneficiary or the trustee (if it was written in trust). The process is straightforward:

1. Contact the Insurer: The claimant will need to contact the insurer's claims department. They will need the policy number and the name of the person who has passed away.
2. Provide Documentation: The insurer will require some key documents, most importantly the original Death Certificate. They will also send out a claim form to be completed.
3. Claim Assessment: The insurer will check the policy details and the information provided. They will verify that the policy was in-force and that all premiums were paid. They also check for any evidence of non-disclosure on the original application.
4. The Payout: Once the claim is approved, the money is paid out. If the policy was in trust, the payment is made directly to the beneficiaries, often within a few weeks. If not in trust, it's paid to the estate, where it will be subject to the probate process.

A claim may be declined in very specific circumstances, such as clear non-disclosure (e.g., a smoker claiming to be a non-smoker), fraud, or if death occurs due to an event specifically excluded in the policy terms (though this is rare in modern policies).

The Different Types of Protection Insurance Explained

Life insurance isn't a one-size-fits-all product. There are several different types, each designed for a specific purpose. Understanding the differences is key to choosing the right protection for your family.

Let's explore these in more detail.

Term Life Insurance

This is the most common and affordable type of life insurance. It covers you for a fixed period (the 'term'), such as 25 years. If you die within this term, the policy pays out. If you survive the term, the policy ends, and you get nothing back.

• Level Term Assurance (illustrative): The payout amount remains the same throughout the policy term. A £250,000 policy will pay out £250,000 whether you die in year 1 or year 24. It's ideal for providing a general family safety net or covering an interest-only mortgage.
• Decreasing Term Assurance (Mortgage Protection): The payout amount decreases over the term, designed to run alongside a repayment mortgage. As you pay off your mortgage, the amount of cover you need reduces. This makes it a cheaper option than level term cover.
• Family Income Benefit: A unique form of term insurance. Instead of a single lump sum, it pays out a regular monthly or annual income to your family, from the point of claim until the end of the policy term. This is excellent for replacing a lost salary and helping your family manage their budget in a more familiar way.

Whole of Life Insurance

As the name suggests, this policy covers you for your entire life. As long as you keep paying the premiums, a payout is guaranteed whenever you die. Because the payout is certain, premiums are significantly higher than for term insurance. It's often used for two main purposes:

1. Covering Funeral Costs: To ensure your family isn't left with the bill.
2. Inheritance Tax (IHT) Planning: For individuals with large estates, a Whole of Life policy written in trust can provide the funds to pay the resulting IHT bill, preserving the value of the estate for their beneficiaries.

Critical Illness Cover (CIC)

Critical Illness Cover is a living benefit. It pays out a tax-free lump sum if you are diagnosed with one of a list of specified serious medical conditions. It’s designed to provide financial support while you recover, allowing you to pay for medical treatment, adapt your home, or simply cover bills without the stress of needing to work.

Most policies cover 40-50 core conditions, but comprehensive plans can cover over 100. The 'big three' conditions that make up the majority of claims are:

• Cancer
• Heart Attack
• Stroke

Other commonly covered conditions include Multiple Sclerosis, major organ transplant, kidney failure, and Parkinson's disease. CIC can be purchased as a standalone policy or, more commonly, combined with life insurance.

Income Protection (IP)

Often considered the foundation of any financial protection plan, Income Protection pays you a regular, tax-free monthly income if you are unable to work due to any illness or injury.

Unlike CIC which pays a one-off lump sum for a specified condition, IP pays out for as long as you are unable to work, potentially right up until your chosen retirement age. It covers a much broader range of situations, from a bad back or stress (which account for a huge number of long-term absences) to more serious conditions.

You choose a 'deferred period' (e.g., 4, 13, 26, or 52 weeks), which is the time you must be off work before the payments start. The longer the deferred period, the lower the premium. This allows you to align the policy with any sick pay you receive from your employer.

Specialist Cover for Business Owners, Directors and the Self-Employed

If you run your own business or are self-employed, your financial protection needs are unique. You don't have the safety net of an employer's benefits package, making personal and business insurance absolutely vital.

Protection for the Self-Employed and Freelancers

When you work for yourself, if you can't work, you don't get paid. There's no statutory sick pay to fall back on. This makes Income Protection an essential consideration. It acts as your personal sick pay scheme, ensuring you can still cover your personal and business running costs if you fall ill.

Personal Sick Pay policies are a form of short-term IP, often favoured by tradespeople and those in manual roles. They typically have very short deferred periods (as little as one day) and pay out for a limited period, such as 1 or 2 years, providing a crucial buffer during shorter-term incapacity.

Protection for Company Directors

Company directors can access highly tax-efficient insurance solutions paid for by the business.

• Relevant Life Cover: This is a death-in-service benefit for individual directors or employees. The company pays the premium, but the payout goes directly to the employee's family, free from IHT. The premiums are typically treated as an allowable business expense and do not count as a 'benefit in kind' for the employee, making it incredibly tax-efficient for both parties.
• Executive Income Protection: Similar to a personal IP policy, but it is owned and paid for by the business on behalf of a director or key employee. Premiums are a business expense, and the benefit is paid to the company, which then distributes it to the employee via PAYE. This ensures both the individual and the business are protected.
• Key Person Insurance: This protects the business itself against the financial impact of losing a crucial member of staff to death or critical illness. The policy pays a lump sum to the business to cover lost profits, recruit a replacement, or repay a business loan.
• Shareholder Protection: If a shareholder in a private limited company dies, their shares typically pass to their family. This can create a difficult situation where the family may want to sell the shares, but the remaining shareholders may not have the funds to buy them. Shareholder Protection provides the surviving shareholders with the capital to purchase the deceased's shares, ensuring business continuity.

How Much Does Life Insurance Cost?

The cost of your premium is not arbitrary. It's calculated based on the risk you present to the insurer. Several factors are considered:

To illustrate, a 30-year-old non-smoker seeking £200,000 of level term cover over 25 years might pay as little as £8-£12 per month. A 45-year-old smoker seeking the same cover could expect to pay £40-£60 per month or more. (illustrative estimate)

The key takeaway is that life insurance is often far more affordable than people think, especially when you are young and healthy.

Beyond the Policy: Wellness and Added Benefits

Modern insurers are increasingly focused on helping you live a longer, healthier life. Many policies now come with a suite of valuable, free, and non-contractual benefits, available to you from day one of your policy:

• Virtual GP Services: 24/7 access to a UK-based GP via phone or video call.
• Mental Health Support: Access to counselling sessions and mental health resources.
• Second Medical Opinion Services: If you are diagnosed with a serious illness, you can get your diagnosis and treatment plan reviewed by a world-leading expert.
• Fitness and Nutrition Programmes: Discounts on gym memberships and fitness trackers.

At WeCovr, we believe in this proactive approach to health. That's why, in addition to the excellent benefits provided by insurers, we offer our clients complimentary access to our proprietary AI-powered calorie and nutrition tracking app, CalorieHero. We see it as our commitment to go above and beyond, supporting our customers' long-term health and wellness, not just their financial security.

Conclusion: Securing Your Peace of Mind

How does life insurance work in the UK? It works by providing a promise: a promise that if the worst should happen, the people you care about most will be financially secure.

The journey from application to payout is a structured and regulated process designed to be fair to both you and the insurer. By being honest in your application, choosing the right type of cover for your needs, putting it in trust, and reviewing it regularly, you can create a powerful financial safety net.

Navigating the market can feel complex, but you don't have to do it alone. An expert adviser can translate the jargon, compare the options from across the market, and help you secure the right protection at the best possible price. Protecting your family's future is one of the most important financial decisions you will ever make.

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.