Life Insurance Basics: Do You Need It?

Life insurance exists for one purpose: making sure people who depend on you financially aren’t left struggling if you die. If nobody depends on your income, you probably don’t need it. If they do, you probably should have it.

Who Actually Needs Life Insurance

You probably need it if:

• You have a partner who relies on your income
• You have children
• You have a mortgage someone else couldn’t pay alone
• You have debts that wouldn’t be cleared by your estate
• Someone depends on unpaid work you do (childcare, elder care)

You probably don’t need it if:

• You’re single with no dependants
• Your partner could manage financially without you
• You have enough savings to cover any debts
• You’re already retired with sufficient pension

Some employers include life insurance (often called “death in service” benefit) as a perk - typically 2-4 times your salary. Check what you already have before buying more.

Types of Life Insurance

Term Insurance (Level Term)

Covers you for a set period - 10, 20, 25 years, whatever you choose. If you die during that term, it pays out. If you don’t, the policy ends and you get nothing back.

The payout amount stays the same throughout the term. You might choose 25 years to cover the period until your mortgage is paid off or your children are adults.

Cost example: Healthy 35-year-old non-smoker, £200,000 cover for 25 years: around £12-£18 per month.

Decreasing Term Insurance

Same as term insurance but the payout reduces over time, roughly in line with an outstanding mortgage balance. Cheaper than level term because the potential payout is lower in later years.

Makes sense if you’re mainly covering a repayment mortgage. Less useful if you want to leave money for living expenses.

Cost example: Same person, decreasing cover: around £8-£12 per month.

Whole of Life Insurance

Covers you until you die, whenever that is. Guaranteed to pay out eventually (as long as you keep paying premiums).

Much more expensive than term insurance because the insurer will definitely have to pay at some point. Some policies build up a cash value you can access; others don’t.

Cost example: Same person, £50,000 whole of life: around £40-£70 per month.

Family Income Benefit

Instead of a lump sum, pays a regular income to your family until the policy ends. Often works out cheaper than level term and can be easier for families to manage than a large lump sum.

Cost example: Same person, £25,000 per year until end of 25-year term: around £15-£25 per month.

How Much Cover Do You Need?

Calculate based on:

Need	How to Calculate
Outstanding mortgage	Check your statement
Other debts	Add them up
Years of income to replace	Salary × number of years
Childcare costs	Annual cost × years until independent
Funeral costs	Allow £4,000-£6,000

Common approach: Cover your mortgage plus 10 times your salary. For a £250,000 mortgage and £40,000 salary, that’s £650,000.

Sounds like a lot, but term insurance for that amount isn’t as expensive as you’d think.

What Affects the Premium

Insurers price based on likelihood of payout:

Factor	Cheaper	More Expensive
Age	Younger	Older
Health	No conditions	Pre-existing conditions
Smoking	Non-smoker	Smoker (often 2x the price)
Weight	Healthy BMI	Significantly over/underweight
Occupation	Office job	Hazardous work
Hobbies	None risky	Skydiving, climbing
Family history	No early deaths	Parents died young from illness

Smokers pay dramatically more - often double. If you quit for 12 months, most insurers reclassify you as a non-smoker.

The Application Process

When you apply, you’ll answer health questions:

• Your height and weight
• Medical conditions you have or have had
• Medications you take
• Family medical history
• Whether you smoke or drink
• Hazardous activities

Answer honestly. Lying or omitting information can void the policy, meaning no payout when you die.

For larger policies (usually over £300,000), insurers may require a medical exam or access to your GP records.

Critical Illness Cover

Often sold alongside life insurance. Critical illness pays out if you’re diagnosed with a serious illness from a specified list (cancer, heart attack, stroke, etc.) - not when you die, but while you’re still alive.

Can be added to life insurance or bought separately. Adds significantly to the cost.

Useful if you want money to cover treatment, adapt your home, or stop working. But check the definitions carefully - policies vary in what counts as a qualifying condition.

Writing Life Insurance in Trust

If you die, your life insurance payout normally goes into your estate and may be subject to inheritance tax and probate delays.

Writing the policy “in trust” keeps it outside your estate:

• Pays out faster (no waiting for probate)
• Not counted for inheritance tax
• You choose exactly who gets it

Setting up a trust is usually free through the insurer. Worth doing if your estate might exceed the inheritance tax threshold (£325,000 for most people, with exemptions for spouses).

When to Buy

Younger is cheaper. A healthy 25-year-old pays far less than a healthy 45-year-old for the same cover. Premiums are usually fixed for the term, so buying young locks in low rates.

Before health problems appear. Once you have a condition, premiums rise or cover becomes unavailable. Get covered while you’re healthy.

When life changes. Buying a house, having a child, getting married - these are natural trigger points to assess insurance needs.

Joint vs Single Policies

Couples can buy:

Joint life insurance (first death): One policy covering two people. Pays out when the first person dies, then ends. Cheaper than two single policies but only pays once.

Two single policies: Each person has their own policy. Both can pay out. More expensive but provides more protection.

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 due to age. Two single policies avoid this problem.

What It Doesn’t Cover

Most policies exclude:

• Suicide within the first year (sometimes two years)
• Death from undisclosed pre-existing conditions
• Death from hazardous activities not declared
• Death from illegal activity
• Death from war or terrorism (varies by policy)

Read the exclusions. If you’re declined for one policy due to health, specialist insurers may still cover you (at higher cost).

Comparison Tips

• Get quotes from comparison sites and direct insurers
• Compare like with like (same cover amount, same term length)
• Check what’s included (some add free extras like funeral planning)
• Read reviews of the insurer’s claim handling
• Don’t just take the cheapest - check the insurer is financially solid