Life Insurance Cover

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Life insurance is about providing some financial security for people who depend on you financially, should the worst happen.  These usually include a partner and/or children and there are different types depending on your requirements and circumstances.  When it comes to looking after the ones you love, it pays to be prepared for whatever lies ahead.

There are many different reasons why people choose to take out life insurance, which include:

  • To arrange for their mortgage to be paid of in the event of their death
  • To replace the main earner’s salary
  • To cover school or university fees should the main income earner die
  • To provide money for childcare should the main carer die

What Is Life Insurance?

Life insurance will pay out a lump sum or fixed regular income either when you die (if it's a whole-of-life policy) or if you die within a specified term (term insurance). Some whole-of-life policies also contain an investment element to them, but such investment-type  policies cost quite a more than protection-only insurance.

Term Life Insurance

This is the simplest and least expensive type of life insurance and is known as term insurance because you choose how long you're covered for e.g. 10, 15, or 25 years (the term).

It only pays out if you die within the term you've agreed. If you live longer than the term, the policy expires without paying out. As a couple, you can also take out term cover in both your names, with the policy paying out on the first death only during the term.

There are different types of policy you can have:

  • Family income benefit (a policy which pays out income rather than a lump sum)
  • Increasing policy (where cover and premium rise over the years);
  • Decreasing policy (where cover and premium fall over the years); or
  • Renewable policy (which lets you extend the original term).

Decreasing term insurance is often linked to a repayment mortgage (where the amount you owe decreases over time) and is sometimes called mortgage term insurance or mortgage protection life insurance.

The premiums you pay are usually fixed for the whole term. There are also contracts where premiums are reviewable after a certain period, usually five years.

Whole-of-Life Insurance

Whole-of-life insurance (sometimes call life assurance) pays out an agreed sum when you die, whenever that is, as long as you are still paying the premiums.  It is therefore something of a hybrid product combining both an insurance and an investment element.

The main difference between whole life insurance and term insurance is that payment of the benefit will be inevitable (hence the name 'assurance'). With term insurance, your premiums only go towards a mortality element, as it will only pay out if you die within the chosen term. With whole of life cover, the premiums go partly towards a mortality element and partly towards a savings element, which builds up an investment fund (usually unit-linked) in order to pay the benefit on death. Because of this, whole of life policies tend to be more expensive than term policies.

People take out whole-of-life insurance for the following main reasons:

  • To leave a cash gift to a loved one
  • To cover funeral costs
  • To mitigate inheritance tax liabilities

There are several ways that whole-of-life premiums are managed, which are:

  • With Profits - the sum insured is increased annually by the addition of a reversionary bonus, which permanently increase the basic sum assured payable on death.  A further terminal bonus may also be payable on death (depending on how well the premiums are managed)
  • Unit Linked - each monthly premium buys units in a selected fund at an offer price.  Each month the insurer calculates the cost of the life assurance for the next month only and deducts this charge by ‘cancelling’ just enough of the policyholder’s accumulated units to pay for the cover.  The investment growth will depend on fund performance, how much is being deducted to pay for the life cover, any other optional benefits selected (e.g. critical illness cover) and initial charges.  The premium is usually reviewed on the 10th anniversary and may need to increase at that point (or the sum assured to reduce) depending on the level of unit growth
  • There are other whole of life policies such as universal, low cost and non-profit whole of life insurance.  We recommend speaking to an IFA or qualified insurance adviser before you take out a whole-of-life policy to make sure that it is tailored to your specific needs

Who Really Needs Life Insurance?

If you're a single person with no dependents, then you probably don't need life insurance.  You're better focusing on your own finances, though if you have a mortgage, you may want to consider mortgage protection insurance, critical illness cover or income protection.

If you have a partner then you should definitely consider life insurance and if you have dependents, then some form of life insurance is highly recommended.

Ask yourself 'what if?'  Although life insurance is the one type of insurance policy you hope doesn't have to pay out, your death would probably have the most devastating financial effect on the people you leave behind.  At least of you're financially covered, there should be little or no financial trauma to compound on an emotional one.

Things to Consider when taking out Life Insurance

  • Premiums for smokers are significantly higher than for non-smokers
  • Be honest with the answers you give when applying for a life insurance policy
  • The main priority for term insurance is to cover liabilities such as a mortgage, and then income
  • If you took out your existing life insurance policy quite a while ago, then it's almost definitely worth reviewing for suitability and competitiveness
  • Consider variables such as guaranteed or reviewable premiums, renewability, waiver of premiums (if you're ill or out of work) and whether a joint or single life policy is more suitable.  Ask your adviser about these
  • Make sure that where applicable, policies are written in trust so that payouts are paid to the right people with minimal delay

Useful Links

>>> Speak to an independent insurance adviser and get a quote
>>> How much life insurance cover do I need - life insurance calculator
>>> Find out more about income protection insurance
>>> Find out more about critical illness cover
>>> Find out more about mortgage protection insurance
>>> Need mortgage advice?


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