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A beginner's guide to life insurance

life guideWhat is life insurance for? What is the right type of cover to get? We explain life insurance for beginners, and throw in a few handy hints for good measure.

When you take out a life insurance policy, you’re relying on the cover to offer solid financial protection to your family in the event of your death. So it makes sense to do your homework before you sign up, to make sure you’re getting the most appropriate cover and best-value deal.

In this guide, we explain the basics behind life insurance, and your options when it comes to choosing a policy. You’ll find all the basic information you need to make informed decisions about the type of life insurance that could suit you best, with links to various guides and further information throughout.

What is life insurance for?

Before you sign up for a policy, you need to work out exactly what kind of cover you want it to offer. Some of the main reasons people take out life insurance are listed below:

  • Many people take out life insurance because they've bought a home – a life insurance payout would ensure that their partner or family would be able to pay off the mortgage in the event of their death, and would not therefore face repossession or eviction.
  • Having children is also a common reason for taking out life insurance – a life insurance payout could provide for them while they’re growing up if they could no longer rely on your income.
  • Or you could want to set up a policy to provide your surviving relatives with an inheritance when you die.

Whatever the reasons, having the right type of life insurance in place can give you the peace of mind that you have a lump sum to leave your dependants when you die.

How much life cover should you take out?

In general, the more protection your life insurance policy offers, the higher your premiums will be.

  • If your policy is designed to cover only your mortgage, choosing the sum to be insured should be straightforward. You can use our life insurance calculator to figure out exactly how much cover you need, or read our guide to mortgage life insurance for more information.
  • If you want the policy to provide your dependants with a regular income for a number of years, you should look at your current expenditure and think about possible future costs (for example school or college fees) to work out a satisfactory figure.
  • If you’re over 50 and your main concern is to provide an inheritance, or help your family cover funeral expenses, the sum insured may depend more on what you can afford to pay in premiums. Take a look at our guide to over 50s life insurance for more information.

How long should the cover last?

When you buy life cover, it can last either for a fixed period or for the rest of your life. Insurance that applies for a fixed time period is known as term insurance or term assurance.

If you only want cover for your mortgage — which will typically last 25 years — or to give your family a financial safety net while your children are growing up, then term insurance is more appropriate. You can read more about it in our guide to term insurance.

If, on the other hand, you want the policy to provide an inheritance, whole-of-life insurance is a better bet. With term insurance you would run the risk of dying after the policy term has expired (in which case your surviving relatives would get no payout).

Should the level of insurance change over time?

If you’re covering your mortgage, the amount you owe your lender will fall as you make monthly repayments (provided it’s a repayment mortgage rather than an interest-only loan), so it could make sense for the scale of your life cover to reduce in line with the loan. This is known as decreasing term insurance, and premiums will be lower than for cover which remains the same (level term insurance).

Should you get cover for your partner too?

Traditionally, the main earner in a family would take out life insurance. However, even if a partner earns less or they’re a stay-at-home parent, there could still be a financial impact if they died. Also, if you have children you may need to think about costs for child care or domestic work.

If both partners want cover, you can either buy joint life insurance or two separate policies. Joint cover only pays out on the first death, after which the policy ends. Separate policies would pay out when either partner died, thus offering a higher level of protection. This option may be more expensive, but it’s worth comparing prices to see whether any extra costs are worth bearing given the greater scope of the cover. Read more about the differences between the two in our guide to joint life insurance.

What other factors affect the cost of life insurance?

As well as the scope of cover and how long it lasts, there are a number of issues that can impact the size of your premiums, including:

  • Your age
  • Your health
  • Your lifestyle
  • Your family medical history

You can find more details in our guide to how life insurance premiums are calculated.

Saving tax and hassle

One more thing to consider is writing your life insurance policy in trust. This means your family may be able to get hold of any payout with the least hassle and the lowest possible tax charge in the event of your death.

Writing your life insurance policy in trust means the cover is ring-fenced outside of the rest of your assets, such as savings, investments and property. This means that payments from the policy are not included in your estate for inheritance tax purposes. You can find more information in our guide to writing your life insurance policy in trust.

Comparing life insurance policies

With a huge array of companies offering cheap life insurance, it makes sense to go online and compare prices from as many providers as possible.

You can use our comparison service to check prices for different lengths and levels of cover to give you an idea of various policy prices. Use the ‘Get a quote’ button below to start comparing prices, or read our guide to reducing life insurance quotes for more money-saving information.

Buying life insurance is not a decision to be taken lightly, so it’s important to consider exactly what kind of protection your family will need, and what premium you can afford to pay. You can find more information to help you with these decisions in our collection of life insurance guides, and use our comparison service to compare policies and prices from top UK providers.

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