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What is life insurance?

Life insurance is a type of insurance policy which can provide your loved ones with a cash pay out if you pass away during the policy term.

There are various types of life insurance available to meet differing needs and the cost of each policy will depend on your individual circumstances.

Making a claim is a simple process and a pay out can be used as your loved ones wish. Often the proceeds are used to help:

  • Cover a mortgage
  • Meet living costs
  • Provide an inheritance
  • Pay funeral costs
  • Clear personal debts

Find out how life insurance works, watch our short video:

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How does life insurance work?

Taking out family life insurance allows you to protect your loved ones financially if you were no longer around.

If you pass away during your policy term, a cash pay out will be made to your loved ones.

Many people perceive life insurance to be confusing, but it doesn’t have to be.

Life insurance works in four simple steps:

  1. Application
  2. Pay premiums
  3. Claim
  4. Pay out

Using a life insurance broker allows you to obtain all the information you need to make an informed decision and secure a great deal.

Read on to find out how life insurance works here in the UK…

What should life insurance cover?

Before applying for life insurance, you’ll need to think about what it is you want to protect.

Life insurance is very personal to your unique circumstances and needs.

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Life insurance calculator

Calculate how much life insurance you may need by filling in the costs you’d like your policy to cover.

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£137,934 is the estimated mortgage debt per household in the UK.

The purchase of a home is likely to be the largest financial commitment any of us will make in our lifetime. Your life insurance should cover your remaining mortgage balance to allow your loved ones to stay in the family home should anything happen to you.

Source: Moneynerd.co.uk
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The average monthly household budget in the UK is £2,548 (that’s £30,576 per year), which is spent on transport, food & drink, utilities (gas, electricity, water etc), clothing, council tax and leisure activities.

With energy prices hitting a record high and the cost of living rising sharply in the UK, you may wish to factor in utility bills and family living expenses into your cover.

Source: Nimblefins.co.uk
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The average personal debt of UK adults has risen to £34,566 (not including mortgage debt), with credit cards, personal loans and overdrafts being the most common forms of debt.

Factoring in any debts into your life insurance cover means that, if they need to be paid back from your estate after your passing, your loved ones won’t miss out financially.

Source: Money.co.uk
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According to SunLife, the average cost of a funeral in the UK is £3,953 (with the overall cost of dying at £9,200).

Funeral costs have increased by 116% since 2004 and are a significant cost which should be factored into the amount of life insurance you secure.

Source: SunLife.co.uk
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When factoring in cover for your children, you may wish to calculate the amount based on how long it is until they reach financial independence.

This could include childcare (£7,000 per year for part-time care), school expenses (£1,519 per school year for uniforms, lunches, stationary etc), as well as an additional sum for further education (this could be a contribution of up to £5,000 per year).

Sources: Daynurseries.co.uk, Primarytimes.co.uk & Savethestudent.org
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2 in 5 adults say they are relying on an inheritance to fund their retirement.

Factoring in an inheritance to your sum assured could allow loved ones to live a more financially comfortable life. Alternatively, you could leave a cash gift to a charity of your choosing.

Source: Moneyage.co.uk
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If you’re lucky enough to have your own savings or are part of the 30% of UK residents who already have a life insurance policy in place, this can provide financial protection for loved ones.

By entering your current cover, savings or death in service amount you can reduce the sum assured you require.

Source: Scottishbusinessnews.net
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The following points are things to consider when working out what your life insurance should cover:

  • Your lifestyle
  • Your age (how long until you’re at retirement age)
  • How much you can afford
  • Whether you’re a parent or have dependants
  • Number of children that depend on you
  • Age of your children (how long until they are financially independent)
  • The size of your mortgage
  • Whether you have personal savings

In general, if you have dependants and a mortgage, your life insurance should help to relieve them of any financial worries should the worst happen to you.

A pay out from a life insurance policy could help to:

  • Pay off remaining mortgage balance so your loved ones can stay in the family home
  • Cover future family living costs
  • Pay for your funeral
  • Pay off any large debts in your name
  • Be left as an inheritance for your loved ones to enjoy

Life insurance application

Once you’ve determined what you want to cover, you can apply for life insurance directly from any insurer or from a price comparison website.

Alternatively, you can use an FCA-regulated broker who can source quotes and help complete the application form, helping you save time and money.

During the application process you’ll be required to provide information regarding:

  • Your age
  • Health and wellbeing
  • Medical history
  • Smoking status
  • Level of cover
  • Length of cover

Once your application has been accepted, your cover will commence.

On very rare occasions, your application may be declined.

This is only when insurers believe you to be too high risk. This can be due to a number of reasons, such as:

By using an award-winning broker service, like Reassured, you can find the most suitable cover to meet your needs.

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Life insurance policies

Your life insurance policy is essentially the contract of cover between you and your insurance provider.

It provides your loved ones with a cash life insurance pay out if the worst were to happen to you.

In your policy, you’ll nominate beneficiaries who'll benefit from your pay out when you pass away.

You’ll pay a monthly premium for your protection and will be covered for both natural and accidental causes of death.

It's important to make sure you're familiar with the terms and conditions of your policy to ensure it protects you against everything you require.

Typically, insurance policies in the UK are term-based or whole of life.

This means that your policy will either expire after a certain period of time (and a pay out is made if you pass away during this time) or it will last until you pass away (guaranteeing a pay out).

Keep reading to understand how each policy works…

Level term icon

Level term life insurance

Level term life insurance provides cover for a specified period of time (usually up to 40 years) and if you pass away during this time, a pay out is made.

Your sum assured (cover amount) will remain the same throughout your policy. This means that no matter when you pass away (during the term) your loved ones will always receive the same amount.

This makes level term cover ideal for helping to pay off large expenses such as an interest-only mortgage, debts and rising funeral costs.

Decreasing term icon

Decreasing term life insurance

With decreasing term life insurance, the amount paid out to your loved ones reduces over time.

As with level term cover, you’ll be covered for a specific period of time and a pay out will be made if you pass away during the term.

This type of cover is great for helping to pay off a repayment mortgage as you can have your sum assured reduce in line with your remaining mortgage balance.

Whole of life insurance icon

Whole of life insurance

Whole of life insurance provides lifetime cover, ensuring your loved ones receive a pay out when (not if) you pass away.

You’ll be covered for the rest of your life, meaning you’ll continue to pay premiums until you pass away to keep the cover in place.

If you take out a whole of life policy at a young age this can lead to you paying more into the policy than what it’ll pay out.

As a result, whole of life insurance tends to be well suited to those who’re later on in life but still in good health.

A pay out from whole of life insurance can be used to help cover funeral costs or be left as an inheritance for your loved ones to enjoy.

Over 50 life insurance icon

Over 50s plan

An over 50s plan guarantees acceptance to UK residents aged 50-85, with no medical information required.

Once you’ve taken out a policy, you’ll be covered for life. As you don’t have to provide medical information, your premiums will be based on your age and how much cover you want to take out.

Due to the unknown risk you pose to the insurer, premiums tend to be higher and your sum assured will be capped (this is usually at around £20,000 depending on your personal circumstances and budget).

There’s also usually a waiting period added to the policy (the first 12 - 24 months).

No pay out will be made if you pass away due to natural causes during this time, but your premiums will be refunded.

Which type of cover is best for you will depend on why you're looking to secure cover.

You can read our full guide on term life insurance vs whole of life insurance.

Life insurance premiums

The amount you pay for your premium will largely be based on your age, health, the amount of cover you want to take out and how long you want to be covered.

This information allows insurers to assess the level of risk you pose – the higher the risk, the more you’ll pay.

Your cover will remain in place as long as you keep up to date with your monthly premiums.

Failing to pay your life insurance premiums can lead to your policy lapsing and no pay out being made upon your passing.

At Reassured we can secure cover from as little as 20p-a-day † .

Life insurance pay out

A life insurance pay out refers to the sum of money received by a policyholder’s beneficiaries upon their passing.

After you’ve passed away your beneficiaries, or trustee will contact your insurer to make a claim.

The insurer will then review the claim and a pay out will be issued if the claim is valid.

In 2022, 96.7% of UK life insurance claims[1] were successfully paid out.

In order for the claim to be valid:

  • Your payments must be up to date
  • Your policy must be in date
  • All the information provided at application must have been correct

The funds will be paid to your beneficiaries as a lump sum to a UK bank account.

A life insurance pay out is not instant, it can take around 30 days.

When does life insurance not pay out?

In some rare cases, a pay out can be denied due to the claim being invalid.

The contestability clause is a 24-month period where further information about the death can be requested by the insurer to ensure a claim is valid.

If the claim is found to be invalid, the pay out will be declined and no funds will be paid out.

A pay out can also be declined due to non-disclosure. This refers to not being truthful on your application.

For example, if you had a pre-existing medical condition that you didn’t declare at the point of application.

It can be tempting to not declare certain information in the hopes of securing more favourable premiums but this can lead to your cover becoming invalid and your payments being wasted.

If it’s found that you didn’t provide the correct information, the insurer won’t pay out.

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What happens if I don’t die?

If you’ve taken out term life insurance and you outlive the term, no pay out will be made and your cover will expire.

You’ll then need to find new cover to protect you for the remainder of your life.

In the later stages of life you could take out whole of life insurance or an over 50s plan, to provide a guaranteed pay out for your loved ones.

Alternatively, if you’ve no dependants and have paid off your mortgage you might consider opting for a funeral plan instead.

Please note, Reassured are unable to sell funeral plans. If you are looking for a funeral plan we suggest you check the FCA register to find a regulated provider.

What happens if I cancel my life insurance?

If you cancel your policy, you’ll no longer be covered and your family no longer protected.

There's nothing stopping you from cancelling your life insurance policy at any time, but it should always be a last resort.

You’ll not be refunded any of the premiums that you’ve paid in.

There should be no extra charges for cancelling but it’s a good idea to check the terms and conditions of your policy as they can differ between providers.

If you can no longer afford to pay your premium, you can reduce your level of cover or try and find a cheaper policy elsewhere.

If you cancel your policy and choose to take out a new policy later in life, the premiums you’ll pay may cost a lot more due to your age, making comparing quotes even more essential.

Writing your policy life insurance in trust

Writing your life insurance in trust is a legal arrangement that allows your beneficiaries to benefit as much as possible from your investment.

It’s a completely free option that involves placing someone you trust in charge of your life insurance policy.

After your passing, they’ll manage the pay out and be responsible for distributing as you intended.

Writing your policy in trust detaches it from your estate (your money, property and possessions), meaning it gets paid directly to your beneficiaries and is not subject to 40% inheritance tax.

It also allows for the proceeds to bypass probate, resulting in a faster pay out.

At Reassured our customer services team can help write the majority of policies into trust, free of charge.

Do I need life insurance?

Whether you need life insurance is a personal decision.

At Reassured we believe that most people would benefit from some form of cover.

This is to ensure your loved ones are protected in the event of a worst-case scenario.

A pay out from your life insurance policy can help to relieve financial stress at an already stressful time.

Compare life insurance quotes, (save money)

Now you have a better understanding of life insurance you should be able to make a more informed decision when taking out a policy.

You can use our completely fee-free and FCA-regulated life insurance broker service to compare quotes from the UK's largest insurers.

A friendly member of our team will be happy to help you through the process.

Get in touch to receive your free, no-obligation quotes.

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Sources:

[1] https://www.abi.org.uk/news/news-articles/2024/9/protection-insurers-pay-out-record-7.34-billion-to-support-individuals-and-families/

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