Life Insurance UK FAQs
Life insurance is one of the most important financial decisions you can make, yet it's a topic surrounded by questions, confusion, and myths. What type do I need? How much cover is enough? Is it expensive? What if I'm self-employed or have a medical condition?
The peace of mind that comes from knowing your loved ones will be financially secure if the worst happens is invaluable. But navigating the complex world of protection insurance can feel overwhelming.
That’s why we’ve created this definitive guide. As expert insurance researchers and writers, we're here to demystify the process and provide clear, authoritative answers to the most common questions about life insurance in the UK.
WeCovr answers the most common questions about life cover
Think of this article as your personal handbook for understanding life insurance. We'll break down everything from the absolute basics to specialist cover for business owners, helping you make an informed decision with confidence.
The Basics: What is Life Insurance and How Does It Work?
At its core, life insurance is a simple contract between you (the policyholder) and an insurance company.
- You pay regular premiums: This is usually a monthly or annual payment to the insurer to keep your policy active.
- The insurer promises to pay out: If you pass away during the term of the policy, the insurer pays a tax-free cash lump sum to your chosen beneficiaries.
This payout, known as the 'sum assured' or 'cover amount', acts as a financial safety net for the people you leave behind. It can be used to:
- Pay off a mortgage, ensuring your family has a secure home.
- Cover everyday living expenses and bills.
- Fund your children's future education.
- Settle outstanding debts like loans or credit cards.
- Pay for funeral costs.
- Leave an inheritance for your loved ones.
Essentially, it replaces the income and financial support you would have provided, giving your family stability during an incredibly difficult time.
Do I Really Need Life Insurance?
This is perhaps the most fundamental question of all. The answer depends entirely on your personal circumstances. While not everyone needs it, life insurance is crucial for anyone whose death would have a negative financial impact on others.
You should strongly consider life insurance if:
- You have a partner or spouse: Especially if they rely on your income to maintain their standard of living.
- You have dependent children: Life insurance can ensure they are cared for financially until they become independent adults.
- You have a mortgage: A policy can pay off the outstanding balance, lifting a huge financial burden from your family. With the average UK mortgage debt standing at £129,130 in early 2024 according to The Money Charity, this is a primary reason many people take out cover.
- You have other significant debts: Personal loans, car finance, and credit card balances can be cleared with a life insurance payout.
- You want to cover funeral costs: The average cost of a basic funeral in the UK is now over £4,000, a sum many families would struggle to find at short notice.
- You are a business owner: You may need cover to protect your business partners or ensure the business can continue to operate. We'll explore this in more detail later.
Conversely, if you are single, have no dependents, and have no major debts like a mortgage, you may not need life insurance right now. In this case, other types of protection like Income Protection might be a higher priority to protect your own financial wellbeing if you were unable to work due to illness or injury.
The Different Types of Life Insurance Explained
"Life Insurance" is an umbrella term for several different types of policies. Choosing the right one is key to getting protection that matches your specific needs and budget.
Here’s a breakdown of the main options available in the UK:
| Policy Type | How It Works | Best For |
|---|---|---|
| Level Term | The sum assured and premiums remain fixed for the entire policy term (e.g., 25 years). | Covering interest-only mortgages, providing a fixed lump sum for family living costs, or leaving a set inheritance. |
| Decreasing Term | The sum assured reduces over the policy term, usually in line with a repayment mortgage balance. | Covering a repayment mortgage. It's the most affordable type of term cover. |
| Family Income Benefit | Instead of a lump sum, it pays out a regular, tax-free monthly or annual income until the policy term ends. | Replacing a lost salary to cover regular family outgoings in a manageable way. |
| Whole of Life | Covers you for your entire life, guaranteeing a payout whenever you die. | Covering a definite future cost like an Inheritance Tax (IHT) bill or providing a guaranteed legacy. More expensive. |
| Over 50s Plan | A type of whole of life policy with guaranteed acceptance for UK residents aged 50-85, with no medical questions. | Covering funeral costs or leaving a small gift. Payouts are typically smaller. |
Real-Life Example: Level vs. Decreasing Term
- Sarah and Tom have a £250,000 interest-only mortgage. They take out a Level Term policy for £250,000 over 25 years. If one of them dies during the term, the policy pays out the full £250,000, which can be used to clear the mortgage.
- Chloe and Ben have a £250,000 repayment mortgage. They opt for a Decreasing Term policy. As they pay off their mortgage each month, the amount they owe decreases. Their life insurance cover is designed to decrease alongside it. This makes their premiums cheaper than a level term policy.
How Much Life Insurance Do I Need?
Calculating the right amount of cover, or 'sum assured', can seem daunting, but it doesn't have to be. The goal is to ensure the payout is sufficient to meet your family's financial needs without leaving them short or making you pay for more cover than you require.
A common rule of thumb is to seek cover for 10 times your annual gross salary. However, a more tailored approach is always better. Consider the following:
- D - Debts: Total up your mortgage, car loans, credit cards, and any other outstanding debts.
- E - Everyday Expenses: How much income would your family need to replace each year to cover bills, food, and other living costs? Multiply this by the number of years you want to provide for them (e.g., until your youngest child is 21).
- C - Children's Futures: Factor in potential future costs like university fees or a deposit for a first home.
- E - End-of-Life Costs: Include an amount to cover funeral expenses, typically £5,000 - £10,000.
Calculation Example:
- Mortgage: £200,000
- Other Debts: £10,000
- Annual Family Expenses to cover: £30,000 x 15 years = £450,000
- Future University Costs: £50,000
- Funeral Costs: £5,000
- Total Recommended Cover = £715,000
From this total, you can subtract any existing savings, investments, or 'death in service' benefits your employer might provide.
An expert adviser can help you perform a detailed financial review to arrive at a precise figure. At WeCovr, we help clients make sense of these numbers to ensure their families are properly protected.
What Determines the Cost of Life Insurance?
Insurers use a process called 'underwriting' to assess the risk of a claim being made. This determines the cost of your monthly premium. The lower the perceived risk, the cheaper your premiums will be.
Key factors that influence your life insurance premiums include:
- Age: The younger and healthier you are when you take out a policy, the cheaper it will be.
- Health: Insurers will ask about your current health, weight (BMI), and any pre-existing medical conditions.
- Lifestyle: Smoking is the single biggest factor that increases premiums. Your alcohol consumption and any high-risk hobbies (e.g., rock climbing, private aviation) will also be considered.
- Occupation: A desk-based office worker will typically pay less than a scaffolder or someone working in a hazardous environment.
- Policy Details:
- Sum Assured: The higher the cover amount, the higher the premium.
- Policy Term: A longer term (e.g., 30 years vs. 15 years) will cost more.
- Policy Type: Decreasing term is the cheapest, while whole of life is the most expensive.
Illustrative Monthly Premiums for a £200,000 Level Term Policy over 25 Years:
| Age | Non-Smoker | Smoker |
|---|---|---|
| 30 | £9 | £16 |
| 40 | £16 | £35 |
| 50 | £45 | £95 |
Note: These are illustrative figures only. Your actual premium will depend on your individual circumstances.
The significant difference in cost, especially for smokers, highlights the financial benefits of leading a healthy lifestyle.
The Application Process: Honesty is Always the Best Policy
Applying for life insurance involves answering a detailed set of questions about your health and lifestyle. It is absolutely crucial that you answer every question completely and truthfully.
Common questions you'll be asked include:
- Personal Details: Age, address, occupation.
- Cover Required: Sum assured, policy term.
- Health: Height, weight, GP details.
- Medical History: Questions about specific conditions like cancer, heart disease, diabetes, and mental health issues.
- Family Medical History: Whether close relatives (parents, siblings) have suffered from serious hereditary conditions.
- Lifestyle: Your status as a smoker or vaper, weekly alcohol units, and use of recreational drugs.
Withholding information or providing false answers is known as 'non-disclosure'. If you were to die and your insurer discovered you had not been truthful on your application, they could refuse to pay the claim, leaving your family with nothing. Under the Insurance Act 2015, you have a duty to take reasonable care to answer all questions fully and accurately.
Specialist Cover: For the Self-Employed and Business Owners
Standard life insurance is vital, but business owners, directors, and the self-employed have unique needs that require specialist protection.
Protection for the Self-Employed & Freelancers
If you work for yourself, you don't have the safety net of an employer's sick pay or death-in-service benefits. This makes personal protection absolutely essential.
- Income Protection: This should be your number one priority. It pays a regular monthly income if you're unable to work due to any illness or injury, protecting your most important asset – your ability to earn.
- Personal Sick Pay: A short-term form of income protection, often favoured by tradespeople and those in riskier jobs. It typically pays out for up to 12 or 24 months.
- Life and Critical Illness Cover: Provides a lump sum to your family on death or to you on diagnosis of a serious illness, clearing debts and providing financial breathing space.
Protection for Company Directors & Business Owners
Smart business owners protect not just their families but their business itself.
| Business Policy Type | What it Protects | How it Works |
|---|---|---|
| Key Person Insurance | The business's profitability. | The business takes out a policy on a 'key' individual (e.g., a top salesperson, a technical expert, a director). If they die or become critically ill, the payout goes to the business to cover lost profits, recruit a replacement, or repay loans. |
| Relevant Life Insurance | A director's or employee's family. | A tax-efficient alternative to a personal life insurance policy. The company pays the premiums, which are typically an allowable business expense. It is not treated as a P11D benefit for the employee, offering significant tax savings for both parties. |
| Shareholder Protection | The ownership and control of the business. | Provides a lump sum for the remaining shareholders or partners to buy the deceased owner's shares from their estate. This ensures a smooth transition and prevents shares from passing to family members who may not want to be involved in the business. |
| Executive Income Protection | A director's or key employee's income. | Similar to a personal income protection plan, but it's owned and paid for by the business. Premiums are an allowable business expense, and the benefit is paid to the business to then distribute to the employee via PAYE. |
These policies are crucial for business continuity, and structuring them correctly can result in significant tax efficiencies.
Beyond the Basics: Advanced Protection Strategies
Once you have the core cover in place, there are other important elements to consider that can enhance your financial plan.
Putting Your Policy 'In Trust'
Writing your life insurance policy in trust is one of the smartest and simplest things you can do. A trust is a legal arrangement that separates the policy from your legal estate.
The benefits are huge:
- Avoids Probate: A policy in trust is paid directly to your chosen trustees (who then pass it to your beneficiaries) without needing to go through probate, a legal process that can take many months. This means your family gets the money much faster.
- Bypasses Inheritance Tax (IHT): Because the policy payout doesn't form part of your estate, it isn't subject to the 40% IHT charge (for estates over the threshold). This ensures your beneficiaries receive the full amount.
- Gives You Control: You specify exactly who you want to receive the money.
Most insurers offer a free and straightforward trust service when you take out a policy.
Gift Inter Vivos: Protecting Against Inheritance Tax on Gifts
If you gift a large sum of money or an asset to someone, it may still be considered part of your estate for Inheritance Tax purposes if you die within 7 years of making the gift. This is known as a Potentially Exempt Transfer (PET).
A Gift Inter Vivos policy is a special type of life insurance designed to cover this potential tax liability. It's a 7-year decreasing term policy where the sum assured reduces in line with the tapering IHT liability on the gift. It ensures the recipient of your gift doesn't face an unexpected tax bill.
Healthy Living: A Path to Lower Premiums and Better Wellbeing
Insurers reward a healthy lifestyle with lower premiums. Taking steps to improve your health won't just benefit your wallet; it will enhance your quality of life.
- Quit Smoking & Vaping: This is the most impactful change you can make. Ex-smokers who have been nicotine-free for at least 12 months can re-apply for cover and be re-assessed as a non-smoker, potentially halving their premiums.
- Maintain a Healthy Weight: Insurers use the Body Mass Index (BMI) to assess risk. A BMI within the healthy range (18.5 - 24.9) will secure you the best rates. Losing excess weight can lead to significant premium reductions.
- Moderate Your Alcohol Intake: Be mindful of the NHS recommended guidelines of no more than 14 units per week.
- Stay Active: Regular physical activity lowers your risk of many conditions that concern insurers, such as heart disease, stroke, and type 2 diabetes.
To help you on your journey to a healthier lifestyle, WeCovr provides our customers with complimentary access to our exclusive AI-powered calorie and nutrition tracking app, CalorieHero. It's our way of going above and beyond, supporting your long-term wellbeing and helping you achieve your health goals.
Final Thoughts: Taking the Next Step
Life insurance is not a purchase you make for yourself, but for the people you care about most. It's a profound act of responsibility and love, providing a legacy of security and care.
The world of insurance can be complex, but as we've shown, it can be broken down into understandable components. By assessing your needs, understanding the different types of cover, and being honest in your application, you can secure the right protection for your family's future.
Navigating the market to compare dozens of policies from all the major UK insurers can be time-consuming. Working with an independent broker like us at WeCovr can save you time and money, ensuring you find the most suitable policy at the most competitive price.
Can I have more than one life insurance policy?
What happens if I stop paying my premiums?
Is the life insurance payout taxable?
Do I need a medical exam to get life insurance?
Can I get life insurance if I have a pre-existing medical condition?
When is the best time to buy life insurance?
Why life insurance and how does it work?
What is Life Insurance?
Life insurance is an insurance policy that can provide financial support for your loved ones when you or your joint policy holder passes away. It can help clear any outstanding debts, such as a mortgage, and cover your family's living and other expenses such costs of education, so your family can continue to pay bills and living expenses. In addition to life insurance, insurance providers offer related products such as income protection and critical illness, which we will touch upon below.How does it work?
Life insurance pays out if you die. The payout can be in the form of a lump sum payment or can be paid as a replacement for a regular income. It's your decision how much cover you'd like to take based on your financial resources and how much you'd like to leave to your family to help them deal with any outstanding debts and living expenses. Your premium depends on a number of factors, including your occupation, health and other criteria.The payout amount can change over time or can be fixed. A level term or whole of life policy offers a fixed payout. A decreasing term policy offers a payout that decreases over the term of the cover.
With critical illness policies, a payout is made if you’re diagnosed with a terminal illness with a remaining life expectancy of less than 12 months. While income protection policies ensure you can continue to meet your financial commitments if you are forced to take an extended break from work. If you can’t work because you’ve had an accident, fallen sick, or lost your job through no fault of your own, income protection insurance pays you an agreed portion of your salary each month.
Income protection is particularly helpful for people in dangerous occupations who want to be sure their mortgage will always be covered. Income protection only covers events beyond your control: you’re much less likely to be covered if you’re fired from your job or if you injure yourself deliberately.
Questions to ask yourself regarding life insurance
Just ask yourself:👉 Who would pay your mortgage or rent if you were to pass away or fall seriously ill?
👉 Who would pay for your family’s food, clothing, study fees or lifestyle?
👉 Who would provide for the costs of your funeral or clear your debts?
👉 Who would pay for your costs if you're unable to work due to serious illness or disability?
Many families don’t realise that life, income protection and critical illness insurance is one of the most effective ways to protect their finances. A great insurance policy can cover costs, protect a family from inheriting debts and even pay off a mortgage.
Many would think that the costs for all the benefits provided by life insurance, income protection insurance or critical illness insurance are too high, but the great news is in the current market policies are actually very inexpensive.
Benefits offered by income protection, life and critical illness insurance
Life insurance, income protection and critical illness insurance are indispensable for every family because a child loses a parent every 22 minutes in the UK, while every single day tragically 60 people suffer major injuries on the UK roads. Some people become unable to work because of sickness or disability.Life insurance cover pays out a lump sum to your family, loved ones or whomever you choose to get the money. This can be used to secure the financial future of your loved ones meaning they would not have to struggle financially in the event of your death.
If it's a critical illness cover, the payout happens sooner - upon diagnosis of a serious illness, disability or medical condition, easing the financial hardship such an event inevitably brings.
Income protection insurance can be very important for anyone who relies on a pay check to cover their living costs, but it's especially important if you’re self-employed or own a small business, where your employment and income is a bit less stable. It pays a regular income if you can't work because of sickness or disability and continues until you return to paid work or you retire.
In a world where 1 in 4 of us would struggle financially after just four weeks without work, the stark reality hits hard – a mere 7% of UK adults possess the vital shield of income protection. The urgency of safeguarding our financial well-being has never been more palpable.
Let's face it – relying on savings isn't a solution for everyone. Almost 25% of people have no savings at all, and a whopping 50% have £1,000 or less tucked away. Even more concerning, 51% of Brits – that's a huge 27 million people – wouldn't last more than one month living off their savings. That's a 10% increase from 2022.
And don't even think about state benefits being a safety net. The maximum you can expect from statutory sick pay is a mere £109.40 per week for up to 28 weeks. Not exactly a financial lifeline, right?
Now, let's tackle a common objection: "But I have critical illness insurance. I don't need income protection too." Here's the deal – the two policies apply to very different situations. In a nutshell:
- Critical illness insurance pays a single lump sum if you're diagnosed with or undergo surgery for a specified potentially life-threatening illness. It's great for handling big one-off expenses or debts.
- Income protection, on the other hand, pays a percentage of your salary as a regular payment if you can't work due to illness or injury. It's the superhero that tackles those relentless monthly bills.
Types of life insurance policies
Common reasons for getting a life insurance policy are to:✅ Leave behind an amount of money to keep your family comfortable
✅ Protect the family home and pay off the mortgage in full or in part
✅ Pay for funeral costs
Starting from as little as a couple of pounds per week, you can do all that with a Life Policy.
Level Term Life Insurance
One of the simplest forms of life insurance, level term life insurance works by selecting a length of time for which you would want to be covered and then deciding how much you would like your loved ones to receive should the worst happen. Should your life insurance policy pay out to your family, it would be in a lump sum amount that can be used in whatever way the beneficiary may wish.
Decreasing Term Life Insurance
Decreasing term life insurance works in the same way as level term, except the lump sum payment amount upon death decreases with time. The common use for decreasing term life cover is to protect against mortgage repayment as the lump sum decreases along with the principal of the mortgage itself.
Increasing Term Life Insurance
Increasing term life insurance aims to pay out a cash sum growing each year if the worst happens while covered by the policy. With increasing term life cover amount insured increases annually by a fixed amount for the length of the policy. This can protect your policy's value against inflation, which could be advantageous if you’re looking to maintain your loved ones’ living standards, continue paying off your mortgage in line with its repayment schedule and cover your children’s education fees.
Whole of Life Insurance
Whereas term life insurance policies only pay out if you pass away during their term, whole of life insurance pays out to your beneficiaries whenever this should happen. The most common uses for whole life insurance are to cover the costs of a funeral or as a vehicle for your family's inheritance tax planning.
Family Income Benefit
Family income benefit is a somewhat lesser-known product in the family of life insurance products. Paying out a set amount every month of year to your beneficiaries, it is the most cost-effective way of maintaining your family's living standards to an age where you'd expect them to be able to support themselves financially. The most common use would be for a family with children who are not working yet so are unable to take care of themselves financially.
Relevant Life Insurance
Relevant Life Insurance is a tax-efficient policy for a director or single employee. A simple level term life insurance product, it is placed in a specific trust to ensure its tax efficiency. The premiums are tax deductible and any benefit payable should a claim arise is also paid out tax free, which makes it an attractive product for entrepreneurs and their businesses.
Important Fact!
We can look at a more suitable option mid-term!
Why is it important to get life insurance early?
👉 Many people are very thankful that they had their life, income protection, and critical illness insurance cover in place before running into some serious issues. Critical illness and income protection insurance is as important as life insurance for protecting your family's finances.👉 We insure our cars, houses, bicycles and even bags! Yet our life and health are the most precious things we have.
Easily one of the most important insurance purchases an individual or family can make in their lifetime, the decision to buy life, income protection, critical illness and private medical health insurance can be made much simpler with the help of FCA-authorised advisers. They are the specialists who do the searching and analysis helping people choose between various types of life insurance policies available in the market, including income protection, critical illness and other types of policies most suitable to the client's individual circumstances.
It certainly won't do any harm if you speak with one of our experienced FCA-authorised insurance partner experts who are passionate about advising people on financial matters related to life insurance and are keen to provide you with a free consultation.
You can discuss with them in detail what affordable life, income protection, critical illness or private medical health insurance plan for the necessary peace of mind they would recommend! WeCovr works with some of the best advisers in the market.
By tapping the button below, you can book a free call with them in less than 30 seconds right now:
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WeCovr is an insurance specialist for people valuing their peace of mind and a great service.👍 WeCovr will help you get your private medical insurance, life insurance, critical illness insurance and others in no time thanks to our wonderful super-friendly experts ready to assist you every step of the way.
Just a quick and simple form and an easy conversation with one of our experts and your valuable insurance policy is in place for that needed peace of mind!