Life insurance is designed to provide financial support for your loved ones in the event of your death, which can help with anything from funeral costs to living expenses.
If you have a partner, children or any relatives who depend on you financially, life insurance could prove invaluable if you’re no longer around, but it’s also worth considering if you aren’t earning.
Here, we explain how life insurance works, and who’s likely to need it.
How does life insurance work?
When you buy life insurance, you agree to pay your insurer a certain amount of money every month, either for a specific term or for the rest of your life. These payments are called premiums. If you die during the term of your cover then your family will receive an agreed lump sum payout. They can decide what to spend this money on, and it is often put towards funeral costs, paying off a mortgage, education costs, or to cover general living expenses.
Who needs life insurance?
If you have anyone in your life who depends on you financially – children, a partner, or other relatives – then it’s usually well worth considering life insurance, as it can provide valuable peace of mind that they won’t have to worry about money when you’re gone.
Don’t assume that you won’t need cover if you’re not currently earning. For example, if you’re in a relationship and one partner has taken a career break to raise children and the other is working full-time, you’ll need to consider what would happen if the partner who’s not currently working dies. It may be that the remaining partner would suddenly have to pay for childcare, in which case a life insurance payout could be used to cover these costs.
The government offers some benefits when certain family members die, such as Bereavement Support, but this is generally not enough to cover the cost of living. You can find out more about bereavement benefits in our article Bereavement benefits explained.
Even if you have drawn up a will to provide for your family financially after your death, the process of distributing the estate can be fairly lengthy, so a life insurance payout could cover expenses in the meantime, or help pay for your funeral. Either way, it will likely help reduce the stress of what’s likely to be a very difficult and emotional time for your family.
You might not need life insurance if:
- You are single, and have no children or other people in your life who depend on you financially
- Your partner earns enough to be able to support your family without your income (though bear in mind that a life insurance payout could still help a great deal in this case, and potentially allow your partner to take time off work to grieve)
- Your family could qualify for government benefits that would cover their needs (make sure you have researched these in detail if you think this might be the case).
What are the different types of life insurance?
There are various types of life insurance cover to choose from, so it’s important to find the right policy for your individual circumstances.
Term life insurance tends to be the most popular type of life insurance, and as the name suggests, covers you for a specific term, so is often taken out alongside a mortgage. Term life cover will only pay out if you die during the agreed term, so you won’t receive a lump sum or refund if you end up living longer.
Whole life insurance covers you for the rest of your life, as long as you continue to pay the monthly premiums, but as you’re guaranteed a payout, premiums can be expensive.
Find out more in our guide to Different types of life insurance.
Life insurance will usually only pay out in the event of death. Some policies provide a terminal benefit, meaning they will pay out early if you are diagnosed with a terminal illness. Some insurers will also offer you integrated critical illness cover for slightly higher premiums. Find out more about how critical illness cover works in our guide to Everything you need to know about critical illness cover.
Most life insurance policies do not cover certain causes of death, such as those resulting from drug or alcohol abuse.
If you have been diagnosed with a serious illness then a basic life insurance policy may also exclude causes of death related to this illness. Make sure to go over the terms of your contract carefully so you understand exactly what is and isn’t covered.
Am I already protected?
Before buying any type of life cover, it’s worth checking whether your employer provides you with “death in service” benefits. If you were to die while at that job, your family would receive a payout of multiple times your annual salary (usually three or four years’ worth, though it can be more).
These benefits could provide a large enough amount so that life insurance isn’t a necessity, though you should check how much you’re covered for just in case. Be aware too that this benefit stops if you leave your employer. Find out more in our article Am I protected financially?
How much does life insurance cost on average?
The cost of life insurance will vary quite a bit depending on your circumstances and how large you want the payout to be.
Insurers will take a few factors into account when calculating how much you will pay per month for life insurance. These include:
- Your age
- Your health and medical history
- Your lifestyle and hobbies
- Whether you smoke
- The length of the policy
- The desired payout.
For example, if you are a non-smoker with no health conditions, your life insurance premiums will be cheaper than if you smoke and have any health issues.
It’s important to be honest in your answers to the questions on your application for life insurance, otherwise the policy could be invalidated and the payout your loved ones receive could be affected.
Life insurance can be a big financial commitment, especially if you’re buying cover for the first time in your 50s or 60s when premiums will be higher, but it’s a reliable way to make sure your loved ones are looked after when you’re gone. You can learn more in our article Why life insurance matters.
Like any insurance, always shop around before you purchase a policy. If you have any pre-existing medical conditions it can be helpful to use a fee free specialist life insurance broker to help you navigate the various acceptance criteria and find the right insurance cover for you.
There are a number of fee free brokers available in the market, but if you’re looking for somewhere to start, we’ve partnered with life insurance expert Teddy Cenaj to offer fee-free advice to our members. All you need to do is book a no-obligation call to get personalised fee-free advice and quotes from the whole of the market.
Are you thinking of buying life insurance? If you have it already, do you have any tips for anyone considering it? If so, we’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.