Life insurance UK: the complete guide

Life insurance UK policies exist to protect the people who depend on you financially if you die. In exchange for a regular premium, an insurer agrees to pay a lump sum, or in some cases a regular income, to your chosen beneficiaries if you die while the policy is still active.

Think of it as a financial safety net rather than an investment. You're not saving money in the policy itself (with the exception of whole of life plans, which can build a small cash value over time) - you're paying for the promise of a life cover payout at the right moment. If you stop paying premiums, the cover stops too.

When a valid claim is made, the insurer pays the agreed amount to whoever you named as your beneficiary, or into a trust if you set one up. That money is usually tax-free for the person receiving it, provided the policy is written correctly.

There's no single answer to whether life insurance is worth it - it depends on who and what would be financially affected if you died. A useful starting point is to think about who relies on your income now, and what debts or costs would still need to be paid if you weren't there to help.

Life insurance pays a lump sum on death. If you're more concerned about being unable to work due to illness or injury while you're still alive, income protection insurance is designed to replace lost income in that situation instead, and the two are often used alongside each other.

There are several different types of life insurance explained in more detail elsewhere on our site, but the table below summarises the five main options.

Level term vs decreasing term life insurance

Level term and decreasing term policies are both fixed-length, but they pay out differently. Level term cover stays the same for the whole policy, which makes it suited to interest-only mortgages, income replacement, or general family protection where the amount you need doesn't reduce over time.

Decreasing term cover reduces roughly in line with a repayment mortgage balance, which usually makes it cheaper than level term cover for the same starting amount. Read our full comparison of level term vs decreasing term life insurance to see which fits your mortgage.

A common starting point for how much life insurance you need is to add up your outstanding mortgage or debts, then add roughly ten times your annual income to help replace earnings for your dependants, adjusting for how long they'd need support and any existing savings or workplace cover.

That's only a rule of thumb though, not a formula that fits everyone. Someone with young children and 20 years left on a mortgage generally needs more cover than someone in their fifties with a small mortgage balance and grown-up children.

Insurers price life insurance policies individually, based on how likely they think a claim is and how large that claim might be. The main factors are:

• Age - premiums are lower the younger you are when you take out cover, because statistically you're less likely to die during the term.
• Health and medical history - conditions like heart disease, diabetes, or a family history of certain illnesses can increase cost or lead to specific exclusions.
• Smoker status - smokers and vapers typically pay more, and insurers will ask about this directly.
• Occupation - higher-risk jobs, such as some construction or aviation roles, can affect price or acceptance.
• Cover amount - a larger sum assured costs more than a smaller one, all else being equal.
• Term length - a longer policy term generally costs more overall than a shorter one for the same cover amount.
• Policy type - whole of life cover is typically more expensive than level or decreasing term cover, because it's designed to pay out eventually rather than only within a set term.

Because pricing varies so much between insurers for the same person, two people with identical health and circumstances can be quoted very differently by different providers. This is one of the main reasons to compare a wide range of providers, or ask an advisor to do it for you, rather than accepting the first quote you see.

The right policy often depends on your situation as much as your health. A few common circumstances are worth a closer look, including life insurance for parents and relevant life insurance for company directors.

If you're covering two people, such as a couple with a joint mortgage, you can choose a joint life insurance policy that covers you both under one policy, or two separate single policies.

If you don't take any action, a life insurance payout is usually treated as part of your estate for inheritance tax purposes. That means it could be added to everything else you own when working out whether inheritance tax is due, and it can also delay your family accessing the money while probate is sorted out.

Writing a policy in trust means the payout goes directly to the people you've named, rather than through your estate. In plain English, you're asking someone you trust (called a trustee) to hold and pay out the money on your behalf, according to instructions you set when you take out the policy. This can mean the money reaches your family faster, and sits outside your estate for inheritance tax purposes.

Setting up a trust is usually straightforward, and many insurers include the paperwork for a basic trust as part of the policy, but it's worth discussing with an advisor or solicitor to check it works alongside your will and your wider circumstances. Our guide to how life insurance affects inheritance tax goes into more detail on how the rules apply.

Applying for life insurance usually follows a similar pattern, whichever insurer or route you use. You'll answer a set of health and lifestyle questions, and the insurer decides whether to accept you, and on what terms, based on your answers.

You have a duty to answer these questions accurately and completely. If you don't disclose something relevant, such as a medical condition or your smoker status, the insurer can refuse to pay out or cancel the policy later, even years into the term - this is one of the most common reasons genuine claims are declined.

There are three main ways to arrange life insurance: buying directly from an insurer, using a comparison site, or working with an independent advisor. Each has trade-offs worth understanding before you decide.

Comparison sites are typically paid a fee by the insurers they list, and don't always show every provider on the market. Buying directly from a single insurer means you only see that company's own product, with no comparison at all. An independent advisor giving regulated advice can access a wider range of providers, and you can check any advisor's authorisation yourself on the Financial Conduct Authority register before deciding who to trust with your application.

If you'd rather get independent guidance without speaking to an advisor first, MoneyHelper (moneyhelper.org.uk, 0800 138 7777) offers impartial money guidance backed by the government, including on protection insurance.

When someone dies, the people they've named as beneficiaries (or the trustee, if the policy is in trust) need to contact the insurer directly to start a claim. Most insurers ask for the original policy documents, a death certificate, and sometimes a grant of probate, depending on how the policy is set up.

1. Contact the insurer's claims team and provide the policy number if you have it.
2. Send the death certificate and any other documents the insurer asks for.
3. The insurer reviews the claim against the information given when the policy was taken out.
4. Once approved, the payout is usually made within a few weeks, though this can take longer if further information is needed.

Keep in mind that if premiums are missed and not paid within the grace period most insurers allow, the policy can lapse and the cover is lost, even if you've been paying for years. If you're struggling to keep up premiums, it's worth speaking to your insurer or an advisor before cover lapses, or contacting Citizens Advice for guidance on managing the wider cost.

If you're still weighing up your options, here's a quick way to think about where to look next, including our guide to the best life insurance providers in the UK.