How does life insurance work?
Life insurance works in much the same way as any other insurance policy - you pay a monthly premium, and your insurer pays out in the event of a claim. Where life insurance differs is in who your pay-out goes to.
The money paid out if you die, normally forms part of your estate. Your estate is the total value of everything you leave behind when you die. It’ll usually pass to your named beneficiaries, who are the people you choose to leave something behind for.
How much your loved ones get can depend on the type of policy you take out. There are policies that can pay out after you’ve died or while you’re alive.
Standard life insurance, also called term life insurance, will pay out the same amount if you die in week one or week 100.
Decreasing term life insurance pay-outs change over the course of the policy - it decreases the longer you get into the policy. It’s normally used to cover your mortgage, which should also decrease over time.
Critical illness cover will pay out if you’re diagnosed with a serious illness or are severely injured, allowing you to focus on getting better.
What affects the price of life insurance?
There are a few things that can affect how much life insurance costs.
These typically include:
- Your age
- Amount of cover
- Policy length
Your age. The older you are, the more you’re likely to pay
Lifestyle choices such as drinking, smoking, including vaping and use of nicotine replacements, and other risky behaviours, can all edge up your premiums
Weight. If you’re very overweight, your likelihood of developing an obesity-related illness increases, and so does your premium cost
Medical history and pre-existing conditions like asthma, or a family history of certain diseases, could also see you paying more
Amount of cover you want. Typically, the higher the pay-out you’re looking for, the higher your premiums are likely to be. See our guide for advice on how much life insurance cover you need, or use our life insurance calculator to work out exactly how much cover you need
Policy length can also affect your life insurance policy price because the longer you want the term to be, the more you’re likely to pay out in premiums
Salary plays a part too. The more you earn, the higher your expenses are likely to be. So you’ll need more cover to maintain your family’s standard of living which means a higher premium price
Occupation. If you’re a fireman or an oil rig worker, or have another high-risk job, your premiums will probably be higher than those with low-risk jobs, such as an office worker or milk man
Take a look at our guide for a deeper dive into how life insurance premiums are calculated and what that means for you.
What doesn’t life insurance cover?
With a standard life insurance policy, if you die due to an accident or illness developed during the period you’re covered (known as your policy term), your insurer will usually pay out. But there are a few cases where it might not.
These could include death as a result of:
- Drug or alcohol misuse
- Suicide or self-inflicted injuries
- Gross negligence or a reckless act
- War or terrorism
Drug and alcohol misuse will almost never be covered. But some of the above cases may be, depending on your insurer. If you have any concerns, it’s always worth checking with them before you take out a policy.
Or for an overview of the reasons life insurance won’t pay out, isn’t covered, take a look at our guide on life insurance exclusions.
What our life insurance expert says
Before you take out a policy, think about how much your family would need to live comfortably should you pass away. If you have a mortgage, or any other debts you want your pay-out to clear, factor these in too. Life insurance is a safety net, so getting it right is crucial.
Life insurance expert
Need more help?
Whether you pay tax on your life insurance pay-out depends on how big your pay-out is.
Life insurance contributes to your estate. This is the total value of everything you pass on when you die:
- If your pay-out brings your estate’s worth to more than £325,000, then you’ll pay 40% tax on it
- If your estate amounts to less than £325,000, even after your pay out, you’ll pay no tax on it
Even if your pay-out takes you over the £325,000 limit, you can still avoid paying tax on it by writing your life insurance in trust. Here your pay-out is put into a trust, which is then paid directly to your beneficiaries. Your pay-out will now be seen as separate to your estate, and you’ll pay no tax on it.
There are other benefits to writing your life insurance in trust, too. Your pay-out will often be able to sidestep the complicated legal proceedings after your die, meaning your loved ones could get the money quicker. You can also explicitly name the beneficiaries of your trust, meaning that your pay-out goes to exactly who you want it to, when you want it to.
In most cases, you can get life insurance if you have pre-existing conditions.
Diabetes, asthma, high blood pressure and any illnesses you’ve been diagnosed with prior to taking out a policy will all be classed as pre-existing conditions. If you have any of these, you should still be able to get cover. You’ll just have to pay more in premiums.
Life insurers calculate your risk of dying during the policy term. You’re then offered cover based on those calculations. Sadly, as pre-existing conditions increase your risk of passing away before your policy ends, your premiums are likely to be higher than those with no medical conditions.
There are also a few pre-existing conditions that may not be covered. Terminal illnesses usually won’t be, and other high-risk illnesses can make it very tricky to find cover.
What’s defined as a ‘high risk illness’ differs from provider to provider however, so it’s worth getting a quote to see whether your pre-existing condition can actually be covered.
Life insurance covers death as a result of illness or injury. To get a pay-out, any illnesses you die of must have developed during the cover period and must not have been known to you before you took out your policy. As long as you meet these criteria, your beneficiaries will get a pay-out.
There are some exclusions. Most policies won’t cover death by drug or alcohol abuse. Suicide is also rarely covered, as is death from self-inflicted injury. Recklessness or gross negligence that lead to your death may also void your policy. And some policies will exclude death due to war or terrorism, too.
However, exclusions differ between insurers. If you want a full rundown of what you’re covered for, it’s always worth reading up on your policy details. Or try our guide on life insurance exclusions.
Yes, if you’re diagnosed with a terminal illness, most policies will pay out while you’re still alive. To be classed as terminal, you’ll have to be given a life expectancy of less than 12 months. If that is the case, you’ll be able to get your whole pay-out before you die. This can help support your family while you’re ill, pay off any outstanding debts, or generally make the rest of your life that little bit easier.
How much life cover you need depends on what you want your pay-out to do.
It can be hard to settle on a final amount. If you’re struggling to figure out just how much life insurance cover you need, try our guide or let our life insurance calculator do the hard work for you.
Things to consider when working out your life insurance cover amount are:
- If you want it to support your loved ones after you die, you’ll need to think about how much money they’d need to keep on living comfortably without you. Think about day-to-day living costs, rent or mortgage payments, and any other financial commitments they may struggle to meet
- If you have any ongoing debts, it’s worth factoring these in too
- If you have a mortgage, you might want your pay out to cover it fully. If so, think about how much you have left to pay and factor this into your cover amount Or you might just want your pay-out to act as inheritance for your children. Here, you’d need to think about exactly how much you’d want to leave behind for them
The short answer is for as long as you need it.
If you’re taking out a policy to cover your mortgage, it’s a good idea to tie the policy length to the remaining years you have left to pay. If you have 20 years left on your mortgage, getting cover for at least 20 years makes the most sense.
If you’re just after a pay-out to support your family once you’re gone, think about how long they’re likely to be financially dependent on you. This may be 25 years or it may be five.
Most policies will have a minimum length you need to hit, too. This differs from policy to policy but is likely to be between one and five years. It all comes down to what you want your policy to cover you for. Tie your policy length to that and you can’t go too far wrong.
Generally, the younger you are when you take out life insurance, the cheaper it’ll be. A typical 18-24-year-old pays £11.01 a month for life cover, whereas a 35-44-year-old pays £26.69 on average. If you’re looking to get the best deal, signing up early is the best way to save**.
If you’re older you can still benefit from life insurance, you’ll just have to pay slightly more for it. 45-54-year-olds pay about £32.22 a month, so you’ll be paying £6-7 more for your policy than those who signed up in their late 30s to early 40s**.
While it may be pricier, there are benefits to signing up later in life. Over 50 life insurance policies usually let you sign up without the need for a medical, and acceptance is normally guaranteed. So even if you’re not in the best of health, you’ll still be able to find cover. The upper age limit is usually around 90, too, so even if you’ve left it very late in life to sign up, you’ll still be able to find a policy that suits you.
Most people take out life insurance after having kids or buying a home. This makes sense, as life cover is usually used to pay off your mortgage should you die or support your loved ones after you’re gone.
If you’ve just stepped onto the property ladder, or welcomed your first child into the world, then now may be the best time to sign up.
*Prices from Confused.com data, averaged across sales of all policy types and lengths for cover of less than or equal to £350,000 in 2020. This contains 84% of customers and is correct as of October 2020.
Life assurance is a life insurance policy that covers you for your whole life.
Normal life insurance runs for a set number of years, say 25. If you die during this period, your beneficiaries get a pay-out. If you survive past that 25-year period, your policy ends. You’ll then either have to find a new policy or live without cover.
Life assurance has no set cover term. You sign up, and as long as you keep paying your premiums, your beneficiaries get a pay-out, no matter when you die. The obvious benefit here is that, as long as you don’t die in a way that isn’t covered by your policy, a pay-out is guaranteed. The downside is that a guaranteed pay-out comes at the cost of a higher premium, so your monthly payments will usually be more than they would for standard life insurance.Whether the extra premium cost is worth it is up to you. Read our whole life insurance guide for the benefits life assurance could offer you.
Yes, you can still get life insurance if you’re a smoker. It’s just usually a little costlier than cover for non-smokers.
As smoking is linked to several health conditions, insurers assume your likelihood of dying during your cover term is much higher. A higher chance of passing way means you’re riskier to insure, which means your premiums will be higher.
There are ways to bring your premiums down though. Proving that you’ve given up nicotine for at least 12 months can often get you a better deal. But bear in mind that nicotine replacements like e-cigarettes and sometimes nicotine patches or gums, can still see you classified as a smoker. You’ll have to prove that you’ve gone 12 months completely nicotine free to reap the full financial benefits of quitting.
Some insurers will ask you to have a medical when you apply for life insurance. But others may not.
Whether you’re asked to have one is often tied to your lifestyle habits. If you’re a young, fit, non-smoker with no pre-existing conditions, you’re less likely to be asked to have one than, say, someone older with a more complicated medical history.
Specific no-medical policies do exist, though. Many over 50 policies will offer you cover without the need to have a medical. And some whole life policies will let you take out cover medical-free, too.
If you’re concerned about having to have a medical to get life insurance, it’s often best to contact the insurer directly to see if you’ll be asked to have one.
Legally, you can have as many life insurance policies as you like.
Some people take out a decreasing term life insurance policy to cover their mortgage, and a separate standard policy to act as inheritance for their loved ones when they die.
Taking out two policies can also be handy if you have death in service benefit through your employer but are worried the pay-out might not be big enough to support your family. Most death in service policies pay out four times your annual salary. Personal life insurance usually pays out around 10 times your salary. Having both in place can ensure your family gets a big enough pay-out to live comfortably should the worst happen.
Some people also take out standard life insurance to boost their joint life insurance pay-out. The joint policy pay-out can then be used to cover their half of their family’s outgoings after they’re gone, and their personal policy pay-out acts as inheritance for their loved ones.
However, taking out more than one policy isn’t always the best option. Two policies means two premiums, two lots of admin, and two sets of arrangements to be made. It’s often easier just to speak to your insurer about tweaking your current policy, to ensure that it covers exactly what you need it to when you’re gone.
A beneficiary is the person who gets your life insurance pay-out if you die.
Most insurers will ask you to name your beneficiaries when you sign up, so it’s a good idea to have an idea of who you want them to be before you take out a policy. While most people choose to name their partner or their children as their inheritors, there’s no rule dictating who you must leave your pay-out to. You could leave it to a friend, or even donate it to a charity.
There’s also no limit on the number of people you can name as beneficiaries, so if you have a large family, you can split your pay-out between all of them.
You could also opt to put your pay-out into a trust. This is especially useful if you’re concerned that your pay-out may be subject to inheritance tax. Putting it into a trust is an easy way to avoid this.
Yes, you can cancel your life insurance if it’s not working for you. But it’s not a decision that should be taken lightly. Cancel now and it may affect your premiums later. If you decide to sign back up at a later date, you’d then have to pay more in premiums for the same level of cover you enjoy now.
You’d also be older when you decided to sign back up, meaning your premiums would almost certainly be higher. You may also have developed a condition in the period between cancelling and signing back up. If that illness is classed as a pre-existing condition, your premiums could be higher again.
So, while you can cancel your life insurance, it’s often better to contact your insurer first. If you’re cancelling due to your premiums being too high, they may be able to offer a tweaked policy that better suits your needs. This way, you’ll be able to keep your cover without having to pay more if you change your mind further down the line.
If you’ve decided it’s really not for you though, find out how to cancel life insurance with our handy guide.
Confused Life is provided by Direct Life & Pension Services Ltd, who are authorised and regulated by the Financial Conduct Authority. Registered office; 2nd Floor Gateway 2, Holgate Park Drive, York, United Kingdom, YO26 4GB. Registered in England and Wales No 2467691. Our service is free and compares a wide range of trusted household names. Confused.com is an intermediary and receives commission from Direct Life & Pension Services Ltd which is based on a percentage of the total annual premium if you decide to buy through our website. We pride ourselves on impartiality and independence – therefore we don’t promote any one insurance provider over another.