Life Insurance Explained: Types, Cover and Trusts

• Term life insurance: runs for a fixed period of time, known as the term, such as five, ten or 25 years, and usually pays out on the death of the policyholder
• Whole of life insurance: pays out no matter when you die, as long as you keep up with your premium payments. It is often used for Inheritance Tax planning and is typically more expensive than shorter-term policies

Many good policies have a terminal illness benefit, which lets you make an early claim if you are diagnosed with an illness where your life expectancy is less than 12 months.

• Level: pays as a lump sum if you die within the agreed term, and the level of cover stays the same throughout. It is the most simple and affordable option
• Decreasing: the level of cover reduces each year. It is designed to be used with repayment mortgages, where the outstanding loan decreases over time
• Increasing: the level of cover rises over the term of the policy, so the lump sum will rise with inflation and should have the same spending power as when you took out the policy

• Joint policy: the money goes to the surviving policyholder, such as your spouse, unless you made alternative arrangements. It is usually more affordable than two separate single policies, but it only pays out on the first death
• Single policy: the money goes into your estate, so you need to decide who it goes to when you die. Buying two single policies would make sure there is a pay out on each death

The amount of cover you need will depend on:

• Any debts
• Your mortgage or rent
• The number of dependents you have
• Your take-home pay, or income from other sources

MoneyHelper says life insurance is suitable if you have dependants, such as school-age children, or a partner who relies on your income, or you want to make sure your loved ones can cover your funeral costs. You might choose not to get it if you are single, your partner earns enough for your family to live on, or you are on a low income and could qualify for State benefits.

Life insurance payouts are not taxed, but they may be added to the value of your estate and be subject to Inheritance Tax. Putting the policy in trust changes that:

• The value of your policy is not considered as part of your estate
• It can be paid out outside probate and inheritance tax
• You can use an independent financial adviser to create a trust deed if you have specific instructions for how the money will be received or when it should be made available
• If you do not name a beneficiary, the insurer pays the proceeds into your estate, which could take a long time to get to the person you want and could mean it is subject to inheritance tax

There are different probate rules in Scotland and in Northern Ireland. Pair your policy with a will so your money reaches the right people. See our Inheritance Tax guide for how the tax works.

For a consumer insurance contract, you have a duty to take reasonable care not to make a misrepresentation to the insurer. A qualifying misrepresentation is either deliberate or reckless, or careless, and it is for the insurer to show that it was deliberate or reckless. What the insurer can do then depends on which it was:

• Deliberate or reckless: the insurer may avoid the contract and refuse all claims, and need not return any of the premiums paid, except to the extent (if any) that it would be unfair to retain them
• Careless, and the insurer would not have entered into the contract on any terms: it may avoid the contract and refuse all claims, but must return the premiums paid
• Careless, and the insurer would have entered into the contract on different terms: the contract is treated as if it had been entered into on those terms if the insurer so requires
• Careless, and the insurer would have charged a higher premium: it may reduce proportionately the amount to be paid on a claim

If you have had a final response and are not happy with the outcome you can ask the Financial Ombudsman Service to investigate, which is free and easy to use. See our insurance claim refused guide. Make sure you know exactly what is and is not covered, because definitions and exclusions can vary between different insurers. You have 30 days from buying the policy to change your mind and get a full refund. You can ask your insurer to cancel your policy at any time, but there are usually no cancellation fees and you will not receive a refund of premiums already paid, and you will not be able to reinstate the policy once it is cancelled. If you are struggling to pay, contact your insurer and tell them you are struggling: insurers must support customers in financial difficulty.

See our guide on how much critical illness cover you need and on what income protection insurance is.

This guide is general information, not financial advice, and we do not recommend specific providers. MoneyHelper describes itself as a way to get clear, free, impartial help for all your money and pension choices. The Financial Services Register lists all firms and individuals involved with regulated activities that the FCA has currently or previously approved, and you can search it at register.fca.org.uk.