Life insurance basics: do you need it?

Life insurance is pretty straightforward. It exists so that if something happens to you, the people who depend on your money don’t get left short. If nobody depends on your income, you probably don’t need it. If someone does, you probably should have it.

So when do you actually need it? If you’ve got a partner relying on your income, or kids, or a mortgage that someone else couldn’t pay alone, or debts that wouldn’t be cleared by your estate, or you’re doing unpaid work like childcare or elder care that someone depends on - then you need it. If you’re single with no dependants, your partner could manage without you, you’ve got savings to cover debts, or you’re already retired with a decent pension, then you probably don’t.

Before you buy your own policy though, check what your employer gives you. Some include “death in service” as a perk - usually 2-4 times your salary. No point doubling up if you’re already covered.

Types of life insurance

Term insurance is the simplest. You pick a period - 10, 20, 25 years, whatever makes sense - and if you die during that time, it pays out. If you live through it, the policy ends and you get nothing back (which is the whole point). The payout stays the same the whole way through. Most people choose 25 years because that covers the mortgage payoff and the kids being independent.

A healthy 35-year-old non-smoker can get £200,000 of level term for 25 years for about £12-£18 a month.

Decreasing term insurance is similar but the payout gets smaller over time, roughly in line with a mortgage balance. It’s cheaper because the insurer’s risk gets lower as the years go on. It makes sense if you’re mostly covering a mortgage, but less useful if you want to leave money for living expenses.

The same person could get decreasing cover for about £8-£12 a month.

Whole of life insurance covers you until you actually die, whenever that is. It’s guaranteed to pay out eventually (as long as you keep paying premiums). But it costs way more than term insurance because the payout’s going to happen eventually. Some of these build up a cash value you can access; most don’t.

That person could get £50,000 of whole of life for something like £40-£70 a month.

Family income benefit is different - instead of a lump sum, it pays regular income to your family until the policy ends. Often works out cheaper than level term and can actually be easier for families to manage than getting a huge lump sum all at once.

The same person could get £25,000 per year until the end of a 25-year term for around £15-£25 a month.

How much cover do you actually need?

Start with your outstanding mortgage. Add up any other debts. Think about how many years of income you want to replace - typically a few years of salary helps cover the loss. Factor in childcare costs. Add a buffer for funeral costs (allow £4,000-£6,000).

A rough rule that we’d recommend is your mortgage plus 10 times your salary. So if you’ve got a £250,000 mortgage and earn £40,000, that’s £650,000. Sounds like a fortune, but term insurance for that amount isn’t actually as pricey as you’d expect it to be.

What affects your premium

Insurers basically look at how likely you are to die and charge accordingly. Younger people pay less. People with no health conditions pay less. Non-smokers pay way less (smokers often pay double the price, which is pretty significant). Healthy weight is cheaper. Office workers cheaper than people in hazardous jobs. No risky hobbies cheaper than skydiving or climbing. And family history matters - if your parents died young from illness, that counts against you.

Smoking is the big one. If you smoke, you’ll pay about double. But if you quit for 12 months, most insurers will reclassify you as a non-smoker.

The application process

When you apply, you’ll get asked about your height and weight, any medical conditions you’ve got or have had, what medications you’re on, family medical history, whether you smoke or drink, and any hazardous activities you do. Answer honestly. Seriously. Lying or leaving things out can void the entire policy, which means no payout when you die.

For bigger policies (usually over £300,000), they might ask for a medical exam or want to see your GP records.

Critical illness cover

This often gets sold alongside life insurance. It’s different though - it pays out if you’re diagnosed with a serious illness from a specific list (cancer, heart attack, stroke, that sort of thing). It’s not about dying; it’s about getting a diagnosis while you’re still alive. You can add it to life insurance or buy it separately, and it does add significantly to the cost.

It’s useful if you want money to cover treatment, adapt your home, or stop working while you recover. But read the definitions carefully - what counts as a qualifying condition varies between policies.

Writing life insurance in trust

Normally when you die, your life insurance payout goes into your estate and might be hit with inheritance tax and delays while probate happens. Writing the policy “in trust” takes it outside your estate. It pays out faster (no probate waiting), it’s not counted as part of your estate for inheritance tax purposes, and you get to decide exactly who gets it.

Most insurers let you set this up for free. Worth doing if your estate might go over the inheritance tax threshold (that’s £325,000 for most people, though there are exemptions for spouses).

When to buy

Younger is definitely cheaper. A healthy 25-year-old will pay way less than a healthy 45-year-old for the same cover. Premiums are fixed for the term, so buying young locks in those low rates.

Get covered before health problems show up. Once you’ve got a condition, premiums go up or you can’t get cover at all. Buy it while you’re still healthy.

Natural trigger points are when life changes - buying a house, having a kid, getting married. That’s when you should review whether you need insurance.

Joint vs single policies

Couples can go one of two ways. Joint life insurance covers two people on one policy and pays out when the first one dies, then the policy ends. It’s cheaper than two separate policies but it only pays once.

Two single policies mean each person has their own and both can pay out. More expensive, but better protection. The thing is, if one partner dies, the survivor often still needs cover. With a joint policy, they’d have to buy new insurance, possibly at worse rates because they’re older. Two single policies avoid that problem.

What it doesn’t cover

Most policies exclude suicide within the first year (sometimes two). Death from pre-existing conditions you didn’t disclose. Death from hazardous activities you didn’t declare. Death from illegal activity. And death from war or terrorism (though that varies by policy).

Read the exclusions. If you get declined because of health, specialist insurers might still cover you - they’ll just charge more for it.

Getting the best deal

Get quotes from comparison sites and direct insurers. Make sure you’re comparing the same thing - same cover amount, same term length. Check what’s included (some add extras like funeral planning). Read reviews of how the insurer handles claims - you want to know they’ll actually pay out when the time comes. And don’t just pick the cheapest option. Make sure the insurer is actually financially solid.