Life Insurance Explained
Life insurance pays out a sum of money if you die, giving your family a financial cushion to pay off the mortgage, cover everyday costs, or replace your income. It's one of the simplest and most affordable ways to protect the people who depend on you. This guide explains the main types in clear terms, how to work out how much cover you need, and one step that's free but often missed: writing the policy 'in trust'. It's general information, not advice, to help you understand your options before you speak to a regulated adviser.
- ✓Term life insurance covers you for a set number of years and is the cheapest, most common choice; whole-of-life covers you whenever you die and costs more.
- ✓Level term pays a fixed amount; decreasing term reduces over time and is often used to match a repayment mortgage.
- ✓Work out cover from what you'd leave behind: mortgage, debts, lost income and the cost of raising children.
- ✓Writing the policy 'in trust' is usually free and keeps the payout outside your estate, so it avoids inheritance tax and pays out faster.
- ✓Always answer the medical questions fully and honestly, non-disclosure is the main reason claims are refused.
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The main types of life insurance
- ✓Term life insurance, covers you for a fixed period (say 25 years). It pays out only if you die within the term. It's the cheapest type and suits most families with a mortgage or young children.
- ✓Whole-of-life insurance, covers you for the rest of your life, so it always pays out eventually. It costs considerably more and is often used for leaving an inheritance or covering an inheritance tax bill.
- ✓Family income benefit, a type of term policy that pays a regular monthly income to your family instead of a lump sum, which can be easier for them to manage.
Level vs decreasing cover
- ✓Level term, the payout stays the same throughout. Good for an interest-only mortgage, replacing income, or leaving a fixed amount.
- ✓Decreasing term, the payout reduces over time, usually in line with a repayment mortgage that's also shrinking. It's cheaper than level term.
- ✓Increasing/index-linked, the cover (and premium) rises over time to keep pace with inflation.
You can also choose single cover (one person) or joint cover (two people). Joint policies usually pay out once, on the first death, so two single policies sometimes give a couple better protection, something to weigh up with an adviser.
How much cover do you need?
There's no fixed rule, but a common approach is to add up what would need to be paid or replaced:
- ✓The outstanding mortgage and any other large debts
- ✓Several years of your income, so your family can keep up day-to-day
- ✓The cost of childcare or raising children to adulthood
- ✓Funeral costs and any final expenses
- ✓Then subtract what you already have, savings, and any death-in-service cover from your employer
Writing your policy in trust
This is the step most people don't know about, and it's usually free. Putting your life insurance ‘in trust’ means the payout goes to the people you name, rather than forming part of your estate. The benefits:
- ✓It's normally paid outside your estate, so it isn't subject to inheritance tax as part of it
- ✓It pays out faster, your family doesn't have to wait for probate to access the money
- ✓You control exactly who receives it, regardless of your will
Most insurers offer a free trust form when you take out the policy, or you can set one up later. It pairs naturally with making a will, the two together make sure your money reaches the right people quickly.
Things to watch
Life insurance is a regulated product. This guide is general information, not financial advice, and we don't recommend specific providers. For free, impartial help see MoneyHelper (moneyhelper.org.uk), or use an FCA-regulated broker or adviser, check them on the Financial Services Register at register.fca.org.uk.
Get instant help right now
A Citizens Advice appointment can take weeks. Our free assistant is available 24/7 with no appointment, giving you clear, step-by-step answers about your exact situation, what to do next, and the deadlines that matter.
Need to take action? It can draft a ready-to-send formal letter for you (optional, from £4.99).
England, Scotland, Wales & Northern Ireland.
Frequently asked questions
What's the difference between term and whole-of-life insurance?
Term life insurance covers you for a fixed number of years and only pays out if you die within that term, it's the cheapest type and suits most families protecting a mortgage or children. Whole-of-life insurance covers you for the rest of your life, so it always pays out eventually, but it costs considerably more and is often used to leave an inheritance or cover an inheritance tax bill.
How much life insurance do I need?
A common approach is to add up what would need to be paid or replaced if you died: the outstanding mortgage, other large debts, several years of your income, childcare or the cost of raising your children, and funeral costs. Then subtract what you already have, such as savings and any death-in-service cover from your employer. The result is a rough guide to how much cover to consider.
What does 'writing life insurance in trust' mean?
It means the policy's payout goes directly to the people you name, rather than forming part of your estate. The advantages are that it's normally outside your estate for inheritance tax, it pays out faster because your family doesn't have to wait for probate, and you control who receives it. Most insurers provide a free trust form, so it usually costs nothing to set up.
Why do life insurance claims get refused?
The most common reason is 'non-disclosure', where the policyholder didn't mention a relevant health condition, that they smoke, or a risky hobby, when applying. To protect your family, answer every question on the application fully and honestly, and if you're unsure whether something is relevant, declare it anyway.
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