Life Insurance UK Key Terms Explained Simply
Navigating the world of life insurance can feel like learning a new language. With so many unfamiliar terms and acronyms, it's easy to feel overwhelmed and unsure of where to start. But understanding this jargon is the first step towards securing the right financial protection for you and your loved ones.
This guide is designed to demystify the language of life insurance. We’ll break down the key terms, explain different types of cover, and show you how making informed choices can provide invaluable peace of mind. At WeCovr, we believe that everyone deserves to understand their protection options clearly, without the confusing industry-speak.
Let's dive in and translate the jargon into plain English, so you can make confident decisions about your financial future.
WeCovr’s jargon-free glossary of life insurance terms
Think of this glossary as your personal translator for all things life insurance, critical illness, and income protection. We’ve grouped related terms together to make them easier to understand in context.
The Core Concepts: Building Blocks of Your Policy
These are the fundamental terms you'll encounter on any life insurance policy.
| Term | Simple Explanation | Why It's Important |
|---|---|---|
| Policyholder | The person or entity (like a company) who owns the insurance policy. | The policyholder is responsible for paying the premiums and can make changes to the policy. |
| Life Assured | The person whose life is covered by the policy. This is often the same as the policyholder. | A claim is paid out upon the death or diagnosis of a specified illness of the life assured. |
| Premium | The regular payment (usually monthly or annually) you make to the insurer to keep the policy active. | If you stop paying your premiums, your cover will lapse, and no claim will be paid. |
| Sum Assured | The amount of money the policy will pay out upon a successful claim. This is also called the 'cover amount'. | This is the core benefit your loved ones receive. It should be enough to cover debts, living costs, or other financial goals. |
| Term | The length of time the insurance policy is active for. For example, a 25-year term. | If the life assured passes away after the term has ended, the policy will not pay out. |
| Insurer | The insurance company that provides the cover and agrees to pay the claim. | Choosing a reputable insurer is crucial. WeCovr helps you compare policies from all the UK's leading insurers. |
Types of Life Insurance Policies
Not all life insurance is the same. The right type for you depends on what you want to protect.
Level Term Assurance
This is one of the most straightforward types of life insurance. You choose a sum assured and a term. If you pass away within that term, your beneficiaries receive the fixed lump sum.
- Best for: Covering an interest-only mortgage, providing a lump sum for your family to live on, or leaving a financial gift. The payout amount doesn't change, giving you certainty.
Decreasing Term Assurance (DTA)
Also known as 'mortgage life insurance', the sum assured on a DTA policy decreases over the term. It's designed to reduce roughly in line with the outstanding balance of a repayment mortgage.
- Best for: Covering a repayment mortgage or other long-term loan that reduces over time. Because the cover amount decreases, premiums are typically lower than for level term assurance.
Family Income Benefit (FIB)
Instead of a single lump sum, a Family Income Benefit policy pays out a regular, tax-free income to your family if you pass away during the term. The payments continue from the point of claim until the policy's original end date.
- Example: You take out a 20-year FIB policy for £2,000 a month. If you pass away 5 years into the policy, your family would receive £2,000 a month for the remaining 15 years.
- Best for: Replacing your lost salary to cover regular family outgoings like bills, childcare, and food. It can be easier for a family to manage a regular income than a large lump sum.
Whole of Life Assurance
As the name suggests, this policy is designed to cover you for your entire life, not just a fixed term. As long as you keep paying the premiums, it guarantees a pay-out whenever you pass away.
- Best for: Covering a future Inheritance Tax (IHT) bill, paying for funeral costs, or leaving a guaranteed legacy for your loved ones. Premiums are higher than for term insurance because a pay-out is certain.
Over 50s Life Insurance
This is a type of whole of life plan for UK residents aged 50-85. Acceptance is guaranteed, with no medical questions asked. There's usually a waiting period of 1-2 years at the start; if you die from natural causes during this time, the insurer will typically refund the premiums paid rather than the full sum assured.
- Best for: Those in their 50s or older who want to leave a small lump sum for funeral costs or a small gift, and may have health conditions that make other types of cover difficult to obtain.
Here's a simple comparison of the main policy types:
| Policy Type | Payout Type | Cover Amount | Best For... |
|---|---|---|---|
| Level Term | Lump Sum | Stays the same | Interest-only mortgages, family protection |
| Decreasing Term | Lump Sum | Reduces over time | Repayment mortgages, reducing debts |
| Family Income Benefit | Regular Income | N/A | Replacing a monthly salary |
| Whole of Life | Lump Sum | Stays the same | Inheritance Tax, funeral costs, legacy |
Essential Related Protection Products
Life insurance pays out on death, but what if you become seriously ill or unable to work? These policies provide a financial safety net while you're alive.
Critical Illness Cover (CIC)
This pays out a tax-free lump sum if you are diagnosed with one of a list of specific serious illnesses defined in the policy. Common conditions covered include heart attack, stroke, and some types of cancer.
- Why it's vital: A critical illness diagnosis can have a huge financial impact. A CIC pay-out could be used to pay off your mortgage, cover private medical treatment, or adapt your home. In 2023, UK insurers paid out over £1.3 billion in critical illness claims, supporting over 20,000 individuals and families.
- Good to know: The number and definition of conditions covered can vary significantly between insurers. It's crucial to check the policy details.
Income Protection (IP)
Also known as 'Permanent Health Insurance' (PHI), this policy pays you a regular, tax-free monthly income if you're unable to work due to illness or injury. It continues to pay out until you can return to work, retire, or the policy term ends.
- Deferred Period: This is the waiting period between when you stop working and when the payments start. It can be anything from 4 weeks to 52 weeks. The longer the deferred period you choose, the lower your premium.
- Why it's vital: Statutory Sick Pay (SSP) from the government provides only a minimal safety net (£116.75 per week as of April 2024). For most people, this is not enough to cover their essential outgoings. Income protection is your financial bedrock.
Personal Sick Pay
This is a term often used for short-term income protection policies. They are particularly popular with tradespeople, nurses, electricians, and others in riskier jobs who might not get comprehensive sick pay from an employer.
- Key difference: These policies typically pay out for a limited period, such as 1, 2, or 5 years per claim, unlike a full income protection plan which can pay out until retirement. This makes them more affordable while still offering crucial support.
The Application & Underwriting Process
These are the steps involved in getting your policy set up.
- Application: The form you complete with your personal details, health and lifestyle information, and the cover you want.
- Disclosure: This is your duty to answer all questions on the application form fully and honestly. Failing to disclose relevant information (e.g., a pre-existing medical condition or that you're a smoker) is known as 'non-disclosure' and could invalidate your policy, meaning a future claim could be rejected.
- Underwriting: The process the insurer uses to assess the risk of covering you. They look at your age, health, occupation, hobbies, and family medical history to decide whether to offer you cover and at what price (premium).
- GP Report (GPR): As part of underwriting, the insurer may request a medical report from your GP to verify the information you've provided. You have the right to see this report before it's sent to the insurer.
- Medical Examination: For very large sums assured or if you have complex health issues, the insurer might ask you to attend a medical examination with a nurse or doctor. This often involves measuring your height, weight, blood pressure, and taking a blood or urine sample.
Key Policy Features & Options
These are the extras and choices that allow you to tailor your policy.
- Waiver of Premium: An optional add-on. If you're unable to work due to illness or injury (usually after your chosen deferred period), the insurer will pay your policy premiums for you. This ensures your cover remains in place even when you can't afford the payments. It's a highly recommended feature.
- Indexation (or Inflation-Proofing): This allows your sum assured to increase each year in line with inflation (e.g., the Retail Prices Index - RPI). Your premium will also increase, but it ensures the future pay-out has the same purchasing power as it does today.
- Joint Life vs. Single Life:
- Joint Life Policy: Covers two people (usually a couple) but only pays out once, on the first death. The policy then ends. It's often slightly cheaper than two single policies.
- Two Single Life Policies: Each partner has their own separate policy. If one partner dies, their policy pays out, and the surviving partner's policy remains active. This provides double the potential cover and is often the recommended approach.
- Terminal Illness Benefit: This is included as standard in most term life insurance policies. It allows you to claim the full sum assured early if you are diagnosed with a terminal illness and have a life expectancy of less than 12 months. This can help with end-of-life care and getting financial affairs in order.
- Guaranteed Insurability Option (GIO): This valuable option allows you to increase your sum assured without any further medical questions after certain major life events, such as getting married, having a child, or taking out a larger mortgage.
Specialist & Business Protection
Life insurance isn't just for personal needs. It's also a critical tool for business owners and the self-employed.
For Business Owners & Company Directors
- Key Person Insurance: A policy taken out by a business to protect itself against the financial loss it would suffer if a key employee died or became critically ill. The pay-out goes to the business to help cover recruitment costs, lost profits, or repay business loans.
- Relevant Life Cover: A tax-efficient way for a limited company to provide death-in-service benefits for an employee (including a director). The company pays the premiums, but they are typically treated as an allowable business expense, and it's not a P11D benefit for the employee. The pay-out is made into a trust for the employee's family.
- Executive Income Protection: Similar to a personal income protection policy, but it's paid for by the limited company. It provides a monthly income to an employee if they're unable to work. Like Relevant Life Cover, the premiums are usually a tax-deductible business expense.
For Self-Employed & Freelancers
As a self-employed individual, you are your own greatest asset. If you can't work, your income stops. There's no employer to provide sick pay. This makes Income Protection not just a 'nice-to-have', but an absolute necessity.
The latest ONS data shows there are over 4.3 million self-employed people in the UK. For this vital part of our workforce, a robust income protection plan is the difference between staying financially afloat during illness and facing financial hardship.
For Inheritance Tax (IHT) Planning
- Gift Inter Vivos Insurance: A specialist type of life insurance. 'Gift Inter Vivos' is Latin for a gift between the living. If you gift a large sum of money or an asset (like a house) to someone, it may still be considered part of your estate for Inheritance Tax purposes if you die within 7 years. This policy is a term insurance plan designed to pay out a lump sum to cover the potential IHT liability on that gift.
- Trust: A legal arrangement that allows you to specify who should receive the pay-out from your life insurance policy (the 'beneficiaries'). Writing your policy in trust usually means the money is paid directly to your chosen beneficiaries, bypassing your estate. This has two major benefits:
- Speed: It avoids the often lengthy probate process, getting the money to your family much faster.
- Tax Efficiency: The pay-out typically does not form part of your estate, so it is not subject to Inheritance Tax.
Why Understanding These Terms Matters
Grasping these terms isn't just an academic exercise; it has a profound real-world impact. Choosing a Decreasing Term policy when you needed Level Term could leave your family with a significant shortfall. Forgetting to add a Waiver of Premium could mean your policy lapses when you need it most – when you're too ill to work and can't pay the premiums.
The Association of British Insurers (ABI) reports that in 2023, 97.4% of all protection claims were paid, totalling a staggering £6.85 billion. This shows that policies do pay out. The small percentage of claims that are declined are most often due to 'non-disclosure'—where the customer did not provide accurate information at the application stage.
This highlights the importance of honesty during the application and understanding exactly what you are covered for.
Navigating the Life Insurance Maze: How WeCovr Can Help
Feeling more confident, but still a little unsure which path to take? That's completely normal, and it's where expert advice becomes invaluable.
At WeCovr, we do more than just sell policies. We are an independent broker dedicated to helping you understand your options. We will walk you through all these terms, assess your personal circumstances, and search the entire market to find the policy that offers the right protection at the best possible price.
We also believe in supporting your overall wellbeing. That’s why all our valued protection clients receive complimentary access to CalorieHero, our exclusive AI-powered calorie and nutrition tracking app. By helping you maintain a healthy lifestyle, we’re not just insuring your future; we’re investing in your present health.
Health, Wellness, and Your Insurance Premiums
Insurers base your premiums on risk. A significant part of that risk is your health and lifestyle. Factors like your Body Mass Index (BMI), whether you smoke, and how much you drink can all have a major impact on the cost of your cover.
- Smoking: A smoker can expect to pay double, or even more, for life insurance than a non-smoker of the same age and health. To be considered a non-smoker by insurers, you must have not used any nicotine or tobacco products (including vapes and patches) for at least 12 months.
- BMI: A high BMI can indicate an increased risk of health problems like heart disease and type 2 diabetes. According to the most recent Health Survey for England, 25.9% of adults are living with obesity. Insurers may increase premiums ('load' them) for individuals with a high BMI.
- Alcohol: Consuming alcohol above the recommended weekly limits (14 units per week) can also lead to higher premiums.
Making positive lifestyle changes can not only improve your health but also save you money on your insurance. Simple steps like incorporating more whole foods into your diet, aiming for 150 minutes of moderate-intensity activity a week, and prioritising sleep can make a huge difference.
Frequently Asked Questions (FAQs)
Do I need a medical exam to get life insurance in the UK?
What happens if I stop paying my life insurance premiums?
Is the pay-out from a life insurance policy taxable in the UK?
Can I have more than one life insurance policy?
What is the difference between Terminal Illness Benefit and Critical Illness Cover?
Your Financial Shield
Understanding the language of life insurance is the key to unlocking the right protection. It transforms a confusing product into a powerful tool that can safeguard your mortgage, protect your family's lifestyle, secure your business, and provide a lasting legacy.
Whether you're a first-time buyer, a growing family, a freelancer, or a company director, there is a protection solution designed for your unique needs. The most important step is the one you take today. By investing a little time to understand these concepts, you are empowering yourself to build a more secure financial future.
If you have any questions or would like to discuss your personal protection needs, the expert team at WeCovr is here to help you navigate every step of the way, jargon-free.
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!