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What is life insurance?

You can include critical illness cover as part of your life insurance cover or take it out as a separate policy.

The idea is that if you die, the life insurance pay-out will support your family if they relied on your salary. Your family will be able to spend the money on whatever they want. Some things that tend to be prioritised are:

  • the mortgage

  • household bills

  • debts

  • childcare or education expenses

  • funeral costs

Life insurance should not be confused with life assurance. They are similar products that both pay out when you die, but the premium structure is different. This guide only deals with life insurance.

How does life insurance work?

Most life insurance policies are paid for by monthly premiums. When you buy a life insurance policy you’ll designate beneficiaries who’ll receive the life insurance pay-out. This is called a 'death benefit'.

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Do I need life insurance?

Life insurance isn’t compulsory. However, it’s a good idea to have it if:

  • you’re married

  • have a joint mortgage with your partner 

  • have children

  • if there are other people relying on your salary (for example, elderly parents).

It’s also beneficial for a stay-at-home parent to have life insurance, because if they died the surviving partner would have to pay for childcare or domestic help.

How to buy life insurance

Life insurance is often sold alongside mortgages by mortgage brokers or financial advisers, but you can get life insurance quotes or compare life insurance from other life insurance companies or other financial advisers.

If you’re single, and don’t have children or anyone else that relies on your salary, life insurance might not be the best protection product for you. Income protection or critical illness cover may be a better option.

If you already have life insurance it’s a good idea to review it on a regular basis. Rising mortgage costs and an increased cost of living mean that the amount of cover you need – the “sum assured” –  might change.

You should also review your life insurance policies after certain life events such as:

  • getting married

  • having children

  • changing jobs

  • moving house

  • divorce

Some employers offer life insurance as an employee benefit. This is known as a “death-in-service” benefit. This, like regular life insurance, pays out a lump sum if you die while in employment, at a rate that’s usually a multiple (for example, four times) your annual salary.

How much life insurance do I need?

The cost of a life insurance policy also depends on how much cover you want to take out.

In general, the more protection your life insurance policy offers, the higher your premiums. Cheap life insurance might not offer adequate cover.

When you buy life insurance you might just want to cover your mortgage payments, or other household bills and family expenses too.

You also need to think about how long your family will need cover for. It might be until the mortgage has been paid off, children have left home, or until your partner reaches retirement age.

Frequently asked questions (FAQs)

Can you have more than one life insurance policy?

It’s perfectly legal to hold more than one life insurance policy. Your beneficiaries can claim from all the life insurance policies in place in the event of your death.

What is the difference between a guaranteed and reviewable life insurance policy?

Guaranteed premiums stay the same throughout the term of the policy. Reviewable premiums are revised every five or 10 years and are likely to go up in price.

What is non-disclosure?

When you take out life insurance, you’ll be asked a series of questions. It’s important to answer them honestly – failing to disclose information is known as “non-disclosure” and could mean a subsequent claim is turned down.

Does life insurance cover suicide?

Most life insurance policies won’t pay out if the policyholder commits suicide within the first 12 months of taking out the policy. But most will after this initial period is up.

This is so insurers can guard against people taking out large policies, and then taking their lives, to get their family out of financial difficulties.

In some cases, claims involving suicide might be turned down because there has been non-disclosure about the mental health of the person named on the policy.

Is life insurance taxable?

There’s usually no income tax or capital gains tax to pay on a life insurance pay-out.

There may be inheritance tax to pay on the proceeds of a policy, but this can be legally avoided by putting your life insurance policy in a trust.

What is term life insurance?

A term insurance policy pays out if you die within a given time which is set when you take out the policy. For example, some people take out term insurance to match the term of their mortgage.

What is decreasing term insurance?

With a decreasing term life insurance policy, the benefit payable on death falls each year until it is zero at the end of the policy's term. It is commonly used to protect mortgage repayments as the more repayments you have made before you die, the less will be left for the policy to pay off. 

Decreasing term life insurance is cheaper than term life insurance.

What is a whole-of-life policy?

Whole-of-life policies guarantee to pay the sum assured whenever the person dies.

It’s more expensive than term insurance.

Do you need life insurance to get a mortgage?

Contrary to popular belief, you don’t need to take out life insurance in order to get a mortgage.

The only insurance you need when buying a home is buildings insurance.

Should a couple buy joint life insurance?

Many couples take out joint life insurance, as it is normally cheaper. But this type of policy normally only pays out once – when the first person dies. So the surviving partner will then need to take out another policy if they have dependants, such as children, relying on them financially.

Further resources

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