What is Life Insurance?
Life insurance is something many of us know we should think about, yet it often slips to the bottom of the list. Planning for “what if” scenarios can feel uncomfortable, but life insurance is not about focusing on the worst. It is about providing security and peace of mind for the people who matter most.
This guide explains what life insurance is, how it works, the types of cover available, and how to decide what level of protection could be right for you.
What is life insurance?
Life insurance is a financial safety net. It is a policy that pays a cash lump sum to your chosen beneficiaries if you die during the term of the cover. The money can be used in any way your family chooses. Often it goes towards paying off a mortgage or rent, covering household bills, supporting children’s education, or contributing to funeral costs.
For many families, the payout makes the difference between financial strain and being able to stay secure. You may also find it useful to read our blog on mortgage insurance, which explains how life cover can work alongside other types of protection.
How does life insurance work?
You pay premiums monthly or annually, set by your insurer based on factors such as your age, health, lifestyle, and the amount of cover. If you die during the policy term, your beneficiaries receive the agreed lump sum. If the term ends while you are still alive, the cover simply finishes. Some policies also include terminal illness cover, which pays out if you are diagnosed with a life-shortening condition.
What types of life insurance are there?
Term life insurance: Covers you for a set number of years. If you die during that period, your family receives a payout.
Decreasing term insurance: Designed to cover debts like a repayment mortgage. The payout reduces as your loan decreases.
Level term insurance: Provides a fixed payout that stays the same for the whole term.
Family Income Benefit (FIB): is a type of term life insurance that provides a regular, tax-free income to your dependents if you die within a specified policy term. Instead of a single lump-sum payout, your family receives monthly payments that can replace your salary and help cover daily expenses.
Whole-of-life insurance: Covers you for your entire lifetime. Premiums are higher, but a payout is guaranteed.
Who should consider life insurance?
Life insurance is not compulsory, but it is worth considering if:
You have a mortgage or other large debts
You have children or dependants who rely on your income
You are the main earner in your household
You want your family to remain financially stable if you die
Even if you are single, life cover can help cover funeral costs and reduce stress for loved ones.
How much cover do you need?
The right amount of cover depends on your situation. Many people choose a payout large enough to clear debts plus provide a few years of income for their family. This gives breathing space while loved ones adjust. Our quick guide to insurance and protection (coming soon) will share more practical tips on working out how much cover is right for you.
How much does it cost?
Premiums are usually lower the younger and healthier you are when you apply. Your lifestyle, job, and chosen cover also affect the price. Life insurance can be more affordable than many people expect, especially for young families.
How does life insurance fit with other protection?
Life insurance is often combined with other policies to give wider protection. Critical illness cover pays out if you are diagnosed with a serious condition, and income protection replaces part of your income if you cannot work due to illness or injury. Together, these policies can help cover both long-term and short-term financial needs. You may find it helpful to also read our blog on insurance for mortgages, which explains how different types of cover fit together.
Key takeaways
Life insurance pays out a cash lump sum if you die during the policy term.
The main types are term, decreasing term, level term, family Income benefit and whole-of-life.
Cover can help pay off debts, support dependants, and provide stability.
Costs depend on age, health, lifestyle, and the amount of cover chosen.
Life insurance often works best alongside income and illness protection.
FAQs
Is life insurance compulsory with a mortgage? No. Only buildings insurance is usually required, but many people choose life cover so their mortgage can be repaid.
What happens if I stop paying premiums? Your cover usually ends, and you will not get money back.
Can I have more than one policy? Yes. You might have one to cover your mortgage and another to protect family living costs.
Does it cover illness? Standard life insurance only pays out if you die. Critical illness or income protection are separate policies.