Life insurance pays out a lump sum or regular income to your beneficiaries if you die during the policy term. It's not compulsory, and not everyone needs it. But if you have a partner, children, or anyone else who relies on your income, dying without adequate cover could leave them in serious financial difficulty.
Who needs life insurance?
The straightforward answer: anyone whose death would create a financial problem for someone else. That typically means people with a mortgage (especially joint mortgages), parents with dependent children, anyone whose partner relies on their income, and business owners with partners or employees.
If you're single with no dependants and no debts, life insurance is probably unnecessary. Your estate can cover funeral costs, and nobody depends on your income. But as soon as someone else's financial security is tied to you being alive, the equation changes.
Types of life insurance
Level term insurance
The most straightforward type. You choose a term (e.g., 25 years) and a payout amount (e.g., £200,000). If you die during the term, it pays out the full amount. If you survive the term, the policy ends with nothing paid. Premiums stay the same throughout.
This suits people who want a fixed amount of cover for a specific period — for example, until your mortgage is paid off or your children are financially independent.
Decreasing term insurance
Similar to level term, but the payout amount reduces over time, typically in line with a repayment mortgage balance. Because the potential payout decreases, premiums are cheaper than level term. Often used specifically to cover a mortgage — if you die, it pays off the remaining balance.
Whole of life insurance
Covers you for your entire life, not just a fixed term. Premiums are higher because the insurer will definitely have to pay out eventually. Often used for inheritance tax planning — placing the policy in trust so the payout sits outside your estate. More complex and significantly more expensive than term insurance.
Family income benefit
Instead of a lump sum, this pays a regular tax-free income to your beneficiaries from the date of your death until the end of the policy term. If you die with 15 years left on a policy paying £30,000 per year, your family receives £30,000 annually for 15 years. This is often better suited to replacing ongoing income than a lump sum, and premiums are typically lower than equivalent level term cover.
How much cover do you need?
A common rule of thumb is 10 times your annual income, but that's crude. Think about what your family would actually need:
Outstanding mortgage balance — enough to pay off the mortgage so your family can stay in the home.
Income replacement — how many years of your income would your family need to maintain their living standard? Consider until the youngest child finishes education, or until your partner reaches retirement age.
Specific costs — school fees, childcare, outstanding debts, funeral costs.
Then subtract any existing provision — death-in-service benefit from your employer (typically 2-4 times salary), existing savings, your partner's income. The gap is what you need to insure.
What affects the cost
Life insurance premiums depend on your age, health, smoking status, occupation, and the amount and length of cover. Smokers typically pay double compared to non-smokers. Your health history matters — pre-existing conditions, family medical history, and BMI all factor in. Hazardous occupations or hobbies increase premiums too.
For a healthy 30-year-old non-smoker, £250,000 of level term cover for 25 years might cost £10-15 per month. That's remarkably affordable for the protection it provides.
Writing your policy in trust
If you don't put your life insurance in trust, the payout becomes part of your estate when you die. That means it could be subject to inheritance tax (if your estate exceeds the nil-rate band) and will go through probate, which can delay payment.
Writing the policy in trust ensures the payout goes directly to your chosen beneficiaries, bypasses your estate for IHT purposes, and is paid out faster. Most insurers provide trust forms free of charge. It takes about 10 minutes to set up and can save your family tens of thousands of pounds in tax.
Death in service benefit
Many employers provide death-in-service benefit as part of your employment package — typically 2-4 times your annual salary. This is effectively free life insurance. But it only lasts while you work for that employer. If you change jobs or are made redundant, the cover disappears. Relying solely on death-in-service is risky — it's better treated as a supplement to your own policy.
Joint vs single policies
Joint life insurance covers two people and pays out once — on the first death. It's cheaper than two separate policies but only pays out once, leaving the surviving partner uninsured. Two single policies cost more but provide a payout on each death, which may be important if both partners' incomes are needed.