What's life insurance?

There are lots of different types of life insurance, but they all basically do the same thing. They’re designed to provide money to your dependents, the people who rely on you, when you die.

This guide looks at the options available to you, and could help you decide whether life insurance is right for you. It also uncovers some of the myths about life insurance and provides an explanation of some of the key terms that you may come across.

What are the different types of life insurance?

There are two types of life insurance, as well as some variations you could consider. They both aim to pay out a lump sum when you die during the policy length:

Level – this type of policy is designed to pay out the amount you chose to cover, no matter when you died during the policy length.

Decreasing – this is a policy where the amount that would be paid out gradually goes down as the policy continues. It’s designed to work alongside a repayment mortgage, so the amount of payout goes down roughly in line with your shrinking mortgage debt.

There are lots of other choices you can make about your life insurance policy before taking it out. Like how long you want the policy to run for (the ‘Length’) and how much you want it to pay out (the ‘Amount of cover’). Different providers also offer different options on the basic package, such as indexation options. You can find a list of the most common ones at 'What are the cover options?' tab above.

What is Critical Illness Cover?

When you take out a life insurance policy you could choose to add Critical Illness Cover too at an additional cost. This is similar to life insurance in that is designed to pay out a cash lump sum during the policy length. But in this instance it could pay out if you are diagnosed with a specified critical illness, for example some cancers or heart disease. Exactly which illnesses are covered will be described in the terms and conditions of the policy you choose.

You can buy Critical Illness Cover and life insurance together, so your insurance could only pay out either on diagnosis of a critical illness or if you die during the policy length. Alternatively, you could buy them as separate policies, so each policy would pay out independently, but this may prove to be a more expensive option.

How much will it cost?

As a rule of thumb, the longer the policy and the bigger the payout, the more you will pay for cover. But cover doesn’t have to be expensive. We’ve provided some examples below. We’ve chosen a few options so you can get a feel for prices but of course you would need to get a quote for your personal circumstances to be sure of the cost for you.

'Examples of various life insurance quotes.'
Age Amount of cover Prices for non-smoker Prices for non-smoker with an additional £25,000 of Critical Illness cover Prices for smokers Prices for smokers with an additional £25,000 of Critical Illness cover
Single person 20 £100,000 £5.77 £7.97 £7.04 £11.23
Single person 30 £100,000 £6.47 £10.92 £10.18 £16.81
Single person 40 £100,000 £11.38 £21.12 £21.57 £38.99
Joint cover both 20 £100,000 £7.71 £13.30 £9.71 £17.96
Joint cover both 30 £100,000 £8.57 £17.11 £15.41 £27.76
Joint cover both 40 £100,000 £17.98 £37.22 £36.74 £68.22

These indicative quotes have been provided for us by our partner Legal & General using their products. They are based on buying £100,000 of cover that will stay the same throughout a 25 year term, in other words a level term. They assume that premiums would be paid monthly with no extra options and that no extra medical information was taken into account. For the joint life quote this is based on the amount paying out on the first death only. Life insurance prices do vary from time to time, these figures were correct on 28 February 2018.

What is income protection?

Income Protection is designed to support you financially if you are unable to work due to an illness or injury. Before you take out a policy, you’ll need to think about how much income you’d want to replace, and how long you could wait before the policy started to pay out. State benefits and employer sick pay schemes can be quite complex, so most people tend to take advice from an expert before taking out this sort of cover.

What is a whole of life policy?

This is another type of life insurance but just as the name suggests, you take it out to cover the whole of your life not just for a fixed number of years. It’s normally used to help with tax planning or if there is someone in your life who will always depend on you. Whole of life is quite a specialised form of cover and people tend to discuss it beforehand with a financial adviser.

One important fact about life insurance

Life insurance is like car insurance. It doesn’t have any ‘cash-in’ value. That means you pay for it as long as you need it, but unless you claim on it your policy will have no value.