Life Insurance Explained: Types, Cover and How It Works

What is life insurance?

Life insurance is a policy that pays out a sum of money, known as the benefit, if you die while the policy is active. In exchange, you pay regular premiums to the insurer for the duration of the policy. The payout is typically made to your chosen beneficiaries, such as a spouse, partner, or children, and can be used for whatever purpose they need, from covering everyday living costs to paying off a mortgage.

There are several main types of life insurance, and the right choice depends on what you're trying to protect against. Term life insurance covers you for a fixed period and pays out only if you die within that term, while whole of life insurance covers you for your entire life, provided premiums continue to be paid, and always pays out eventually.

Types of life insurance

Level term insurance provides a fixed payout amount for a set period, and is often used to protect income or provide a lump sum for dependants over a defined number of years. Decreasing term insurance is commonly used alongside a repayment mortgage, as the cover amount reduces roughly in line with the outstanding mortgage balance over time, which typically makes it cheaper than level cover.

Family income benefit pays out as a regular income rather than a lump sum, continuing for the remainder of the original policy term, which can suit families wanting ongoing replacement income rather than a one-off sum. Whole of life insurance, in contrast to term policies, doesn't have an end date and is often used for purposes like covering funeral costs or potential inheritance tax liabilities, since it's guaranteed to pay out eventually.

• Level term: fixed payout over a set period
• Decreasing term: payout reduces over time, often matched to a repayment mortgage
• Family income benefit: pays a regular income rather than a lump sum
• Whole of life: cover for life, with a guaranteed eventual payout

Who needs life insurance?

Life insurance is particularly relevant for anyone with financial dependants, such as a partner, children, or other family members who rely on their income. It's also commonly arranged alongside a mortgage, since many lenders encourage borrowers to consider cover that would help repay the loan if they died, reducing the risk of a surviving partner or family losing the home.

People without dependants or significant debts may feel they need less cover, though some still choose a policy to cover funeral costs or leave a gift to family or charity. Since needs vary so much by individual circumstances, it's worth thinking carefully about who would be financially affected by your death and what a payout would need to cover before choosing a policy, and speaking to a regulated financial adviser if you're unsure what's right for you.

What affects the cost

Life insurance premiums are primarily based on the level of cover and term length you choose, along with personal factors such as your age, health, smoking status, occupation, and family medical history. Generally, the younger and healthier you are when you take out a policy, the lower the premium is likely to be, and starting cover earlier can lock in lower rates for the policy term.

Lifestyle factors such as participation in high-risk hobbies, certain occupations, and any pre-existing medical conditions can also affect pricing, sometimes requiring additional underwriting or medical information. It's important to answer health and lifestyle questions accurately when applying, as inaccurate information could affect whether a claim is paid later.

Choosing the right policy

Start by thinking about what you want the payout to cover — for example, the outstanding balance on a mortgage, a number of years of income replacement, or a lump sum to support your family. This will help determine whether level term, decreasing term, family income benefit, or whole of life cover is the better fit, as well as roughly how much cover you need.

It's also worth considering whether to write the policy in trust, which can help ensure the payout goes to your intended beneficiaries quickly and outside of your estate for inheritance tax purposes, though this is a decision best discussed with a regulated financial adviser given the legal and tax implications involved. This guide is for general information only and isn't financial or medical advice.

How to get a quote

Because life insurance needs vary so much by personal circumstances, speaking to a specialist broker or adviser can help you find a policy suited to your situation. Complete the short form on this page and an FCA-authorised specialist broker will be in touch to discuss your options, with no obligation to proceed.

Frequently asked questions

What's the difference between term and whole of life insurance?

Term insurance covers you for a set period and only pays out if you die within that time, while whole of life insurance covers you for your entire life and always eventually pays out, provided premiums are maintained.

How much life insurance cover do I need?

This depends on your personal circumstances, such as outstanding debts, dependants, and income replacement needs; a regulated financial adviser can help you work out a suitable amount.

Does life insurance cover pre-existing medical conditions?

It can, but insurers will ask about your medical history and may adjust premiums, apply exclusions, or in some cases decline cover depending on the condition, so always disclose this accurately.

What is decreasing term insurance used for?

It's commonly used alongside a repayment mortgage, as the cover amount reduces over time roughly in line with the outstanding mortgage balance.

Is life insurance advice regulated?

Yes, life insurance is a regulated product, and if you need advice on the right type or amount of cover for your circumstances, you should speak to a regulated financial adviser rather than relying on general guidance.