What is life insurance? The different types of policy explained

What is life insurance?

In simple terms, life insurance pays an agreed sum of money to people you choose (your beneficiaries) if you die while the policy is in force. You must pay a monthly fee (or premium) for this.

How much you will pay for life insurance depends on your age, health, lifestyle and how much cover you need, as well as the type of policy you have. 

It's not always an easy subject to understand, so we've outlined the different types of life insurance, how they work, and how to find the right life insurance policy for you.

Member exclusive: get cover via LifeSearch - and a gift card

Choose life insurance, health insurance, income protection and/or critical illness cover via LifeSearch and get a £50 John Lewis gift card.

Get a quote

Policy must be active for 90 days before gift card is issued. T&Cs apply.

How does life insurance work?

Life insurance works by paying your loved ones a lump sum of money if you pass away while the insurance policy is still active.

These payments are tax-free and can be used for any purpose, but are often used to replace lost income and to pay off large debts such as a mortgage. Payments can also be set up to go into trust. This means that your family receives the money sooner, as they won't have to wait for the often-lengthy probate period to be completed. It also means the payment does not form part of your estate so is not subject to inheritance tax (IHT).

You'll pay a set amount every month for the insurance during the policy's term. You must continue to pay the premiums until the end of the term or until you are 90 for whole-of-life cover, sometimes called life assurance.

How much you will pay for life insurance depends on a variety of factors, such as:

• Age: younger people usually pay less
• Health: good health typically means lower premiums
• Lifestyle: smoking or risky hobbies, such as riding a motorcycle or skydiving, can increase premiums
• Coverage amount: more coverage means higher premiums
• Policy type: different types of life insurance have varying costs
• Family health history: a history of certain illnesses may impact costs
• Term length: longer terms might cost more
• Job: risky jobs, such as construction or working at height, can mean higher premiums
• Extras: added coverage options can raise costs

Our insurance experts have assessed the policies of five of the UK's largest insurers. Find out what's the best UK life insurance.

What are the different types of life insurance?

1. Term assurance

Standard life insurance is called term life insurance. You choose how long you want to be covered for – the term.

If you die within the term, the policy pays out. If you don't die during the term, the policy doesn't pay out the death benefit and the premiums you've paid aren't returned.

There are three main types of term life insurance to consider – decreasing term, level term and increasing term insurance. 

• Decreasing term cover is usually linked to a large debt such as a mortgage. You set the payout size and term to match your borrowing (say £200,000 over 25 years). If you die at any point during the term the amount paid out should match the amount you still owe on your debt. It will pay out more if you die early and less if you die close to having cleared your mortgage. Your monthly premiums remain constant throughout the term. This type of cover is the cheapest.
• Level term policies pay out the same amount if you die at any point during the term. Premiums remain constant, but are more expensive than for decreasing term cover because the payout remains the same size. 
• Increasing term policies offer payouts that rise by either a fixed percentage or by an inflation-linked index, such as the Retail Prices Index (RPI) or the Consumer Prices Index (CPI). They are typically more expensive.

Depending on your circumstances, it could be that taking out more than one type of policy (for example, a combination of level and decreasing term cover) works best for your situation.

2. Family income benefit policies

If you die, family income benefit insurance pays out a regular, fixed monthly income to your beneficiaries until the policy's expiry date. This is instead of the lump sum offered by term life insurance. 

The later in the term that you die, the lower the total payout will be, as your family will receive income for less time before the policy expires. This makes it a type of decreasing term policy.

If you're considering a family income benefit policy, it's important to calculate at the outset what sort of monthly income would be needed for your family to be financially stable should you pass away.

• Find out more: how redundancy insurance works

3. Whole-of-life policies

Whole-of-life insurance polices are ongoing policies that pay out whenever you die, providing you keep paying the premiums (usually until you are 90).

Because it's guaranteed that you'll die at some point (and the policy will have to pay out), they're more expensive than term insurance policies, which only pay out if you die within a certain timeframe.

4. Other types of life insurance and cover:

• Joint life insurance: tailored for couples, this insurance ensures that if one partner passes away, a payout is made to provide financial support for the surviving spouse or family.
• Critical illness cover: usually sold alongside a life insurance policy such as term life insurance, critical illness cover will pay out if you develop a listed life-changing illness. This cover gives you a lump sum of money to help with medical costs and other expenses. 
• Terminal illness cover: specifically designed for situations where you're diagnosed with a terminal illness, this cover provides financial support while you're still alive, offering support for medical expenses and other needs. Find out more in our guide to life insurance with cancer.
• Children’s cover: geared towards protecting your children's future, this insurance provides a payout in case of a tragic event like their passing or a critical illness diagnosis, ensuring financial stability during difficult times.
• Over 50s life insurance: this cover is a basic form of life insurance aimed at individuals over 50. However, Which? doesn't recommend this product, because it often pays out less then you've paid in premiums. Instead, those over 50 should consider a policy that suits their needs, such as term life insurance.

What is not covered by life insurance?

There may be certain situations and events that are not covered by life insurance, known as exclusions:

• Non-death events: life insurance is mainly meant to provide a benefit after death and usually doesn't cover events such as disability or critical illness. Separate policies, including critical illness insurance and accidental death or personal accident insurance, can cover life-changing scenarios.
• Suicide within the first two years: while many insurance policies do cover suicide, death from suicide is likely to be excluded during the first two years after the policy starts. The same often applies to death resulting from intentional self-inflicted injuries. Visit samaritans.org for help.
• Illegal or criminal activities: if the policyholder dies due to engaging in illegal or criminal activities, the insurance company may deny the claim.
• Dangerous activities: taking part in high-risk activities or occupations might lead to exclusions or higher premiums. Some policies may specify activities that are not covered.
• Death outside the coverage area: some policies may have geographic restrictions, and deaths outside the covered areas may not be eligible for a payout. 
• Policy lapse due to non-payment: if the policy lapses due to non-payment of premiums, coverage stops, and no benefits will be paid upon the policyholder's death.
• Misrepresentation or fraud: providing false information during the application process may lead to a denial of the claim. 

Are there good reasons to get life insurance?

Having the right life insurance in place is important in a variety of situations, in particular:

• Taking out a mortgage Many people buy their first life insurance when they buy their first home, so that their mortgage will be paid off if they die. When you need to cover a debt such as a mortgage you can buy decreasing term life insurance so the amount paid out reduces over time as you pay off the mortgage. Mortgage protection life insurance is the cheapest type of life insurance.
• Moving in with a partner Whether you get married, have a civil partnership or just move in together, you are making a commitment, so think about how your partner would cope financially if you weren’t there. You can take out a policy to pay them a lump sum that’s either fixed (level term) or rises with inflation (increasing term). You can take out a joint policy or two separate policies. Often separate policies make more sense because you get two possible payouts should you both die during the policy term, for almost the same price as a joint policy that has just one payout. 
• Becoming a new parent / starting a family Having a child often means buying new or additional life insurance so you know your child will be looked after if you die. For young children this might be used for childcare or school fees; for older children this could be university living costs or the deposit on their first home. You can buy level term life insurance until your child reaches a certain age, such as 18, 21 or older – that’s your choice.
• If your estate becomes subject to inheritance tax If your estate has grown in value and you know it will be subject to a large inheritance tax bill, you can take out life insurance, set up in trust, to pay off that tax. That way your family is left with your entire estate intact and is not forced to sell off any property to pay the tax liabilities. You might choose whole of life cover, which will pay out whenever you die. Many such policies cease taking premiums once you reach a certain age, such as 90, but will still pay out. Some of these policies will allow you to cash them in and get some level of payout before you die, but it could be less than you have paid in.

Find out more: Do I need life insurance to take out a mortgage?

What are the health and age factors?

Life insurance premiums are calculated based on your age, health (any pre-existing medical conditions such as diabetes) and lifestyle (alcohol consumption, smoking and any dangerous leisure activities). This is then applied to the sum you want to be insured for.

Compare UK life insurance company costs

The younger you are, the cheaper it is to get life insurance. You can't stop ageing, but the earlier you apply for life insurance the better. This means that although you may only be applying for a small sum to cover your first mortgage, you might be better off buying a large sum of insurance at a young age.

You'll be asked if you have ever had certain conditions, such as cancer; whether other illnesses have been diagnosed within the past five years; and if you have received any medical treatment in the past 12 months. If you answer yes to any of these, the insurer will ask for further details. Insurers will also check your answers with your GP. Pre-existing conditions increase premiums.

You must also tell your insurer how many units of alcohol you drink and whether or not you smoke or vape (or use nicotine-replacement products). These also add to your premiums. Read our guide to life insurance for smokers to find out more.

If you do any dangerous activities – even commuting to work on a motorbike counts – you will also pay more.

Finding a financial adviser and talking about your needs can help ensure you find the right policy and the right level of cover.

• Find out more: accidental death insurance explained

How do I set up a life insurance policy?

Here's a generalised step-by-step process to setting up life insurance::

1. Choose your coverage: decide between the different types of insurance, including term or whole-of-life
2. Determine coverage amount: calculate the money your family would need if you pass away (death benefit)
3. Apply and answer questions: fill out an application, answering health and lifestyle questions
4. Health check (underwriting): the insurer assesses your health risk, which could involve a medical exam or review of your health records
5. Premiums and payments: understand how much you need to pay and how often
6. Policy terms: set how long your coverage lasts (term)
7. Select beneficiaries: choose who gets the money if you pass away - you can update this if your family situation changes
8. Grace period: learn about the grace period for missed payments
9. Claim process: if you pass away, beneficiaries file a claim for the death benefit.

How can I save money on life insurance?

As is often the case, the key to finding the best-value life insurance is comparing all your options. It's not just banks, building societies and insurers that sell life insurance. High street retailers and supermarkets are also worth considering. Or you may be a member of a big club or society that has tied up with a provider to offer a discounted price.

Quite often, one company sells another's life insurance policies, but badged as their own. The price may vary depending on where you buy it, even if the underlying product is identical and provided by the same insurer.

It may be worth seeking the advice of a specialist financial adviser, such as LifeSearch, who can talk through your personal needs and tailor cover and life insurance quotes for you. They will have access to a wider market of corporate and mutual life insurers. If you need large sums insured, you will need to go through a specialist adviser.

When shopping around for your own policies you will be making all the decisions about whether or not the policy is appropriate for you. If you make any mistakes your policy might not pay out or your beneficiaries might not be left with enough money. Here are some options:

• Online life insurance brokers may be able to offer cheaper prices as they pay back to you some or all of the commission they receive from insurers. You'll only get this commission rebate if you buy life insurance without financial advice.
• Price comparison sites such as comparethemarket.com, confused.com or moneysupermarket.com offer life insurance. Make sure you visit a selection of sites as no individual site covers the whole market, and the same insurer may offer a better deal through one comparison site compared with the others. The prices you see may not be the price you get when you finally apply for life insurance, after a medical questionnaire has been completed.
• Cashback websites such as Quidco and TopCashback may help you get a cheaper deal. You're not buying the insurance policy from the cashback site, but are accessing the insurer's own website. The cashback site rebates to you some of the commission it receives from the company selling the insurance.
• A friendly society tax-exempt savings plan often includes life insurance cover. This means that if you die during the term of the plan, your estate will receive the guaranteed sum assured stated in your personal illustration, plus any bonuses. As the sums involved are relatively small, it's common for friendly societies to offer life insurance without prior underwriting. 

A word of warning about focusing too much on price. Getting cheap life insurance doesn't necessarily mean you'll be getting good cover that's properly tailored to your circumstances. Look out for the following:

• Low start life insurance policies These will appear cheap on comparison sites, but the monthly premium increases throughout the term of the policy.
• Reviewable policies The premium is only guaranteed for the first few years (often the first five or 10 years), at which time it is repriced.
• Pre-existing health conditions You should still be able to get life cover, but it may be harder to find and cost more. Relevant charities should have information on specialist life insurance providers.

Member exclusive: get cover via LifeSearch - and a gift card

Choose life insurance, health insurance, income protection and/or critical illness cover via LifeSearch and get a £50 John Lewis gift card.

Get a quote

Policy must be active for 90 days before gift card is issued. T&Cs apply.

• Find out more: Income protection insurance explained

Life insurance FAQs