What is life insurance?

Life insurance is a personal insurance plan designed to pay out a sum of money on the death of the policyholder. Variants of life insurance include policies which pay out a monthly sum instead of a lump sum (family benefit), policies which pay out on survival as well as on death (whole life), and policies which also cover the policy holder for critical illness.

We can help you find a most competitive quotation for all your life insurance needs, including life and critical illness insurance, as well as mortgage protection. Just click on Apply Online for a free quote.

   Frequently Asked Questions

Why do I need life insurance?

Is life insurance just for people with mortgages?

Can I save money on my life insurance even if I have an existing policy?

Are there any circumstances in which a life insurance policy will not pay out?

Should I consider my funeral arrangements as part of my life insurance policy?

What different kinds of life insurance are there?

Why term insurance is sometimes called temporary insurance?

What is the difference between increasing term and increasable term life insurance?

Is there also decreasing term life insurance? Why might I want this?

Is it possible to have my life insurance policy pay out a continuous monthly income, rather than a lump   sum?

How do life-insurance premiums vary between men and women?

How will my age affect the premiums which are paid?

Can I take out a life insurance policy in conjunction with my partner?

How much should I insure my life for?

Q: I am diabetic. How does this affect my life insurance policy?

Q: Is life insurance available to smokers?

Q: Will my premium be reduced if I cut down or give up smoking?

How will my state of health affect my life insurance policy?

Joint Life Policies

Writing Life Insurance in Trust

Life-of-Another Policies

Waiver of Premium

Protect Your Family

Lump-sum Term Insurance

Increasing term insurance

Increasable term insurance

Decreasing term insurance

Renewable term insurance

Convertible term insurance

Family income benefit insurance

Pension-linked term insurance

Critical Illness cover

Mortgage Protection

Income Protection Insurance

Life Insurance Glossary - Terms defined:

Why do I need life insurance?

Whereas most insurance policies are aimed at protecting you and your property, life insurance is necessary to protect the people who depend on you from the financial losses which would occur if you were to die or become seriously ill. Life insurance is also required by some mortgage lenders, so that they have the security of knowing your mortgage will be paid back if you die before the end of the loan period.

Is life insurance just for people with mortgages?

Life insurance policies can be used for a wide number of reasons. If you are only interested in protecting your mortgage payments, then specific mortgage protection life insurance policies are available for this.

Can I save money on my life insurance even if I have an existing policy?

The cost of life insurance has fallen dramatically over the last five years, meaning that it may well be possible to reduce your monthly premiums substantially without having to reduce your cover levels.

Are there any circumstances in which a life insurance policy will not pay out?

Many policies will include certain obvious exclusions such as suicide, or any situation which the insured person has not told the insurer about. For example, if you were insured as a non-smoker, and started smoking, then your life-insurance policy would be void, unless you told your insurer and started paying a higher premium.

Should I consider my funeral arrangements as part of my life insurance policy?

It is certainly advisable to consider the likely costs of funeral arrangements when you are working out the overall benefits you wish to insure yourself for. Maybe this is a more sensible option than taking out a separate pre-paid funeral plan, which can be very expensive.

I am young and fit, and not planning to die soon. When should I get life insurance?

The key issue is to consider life insurance when you have someone who would lose out financially if you were to die. This might be because:

• You have a dependent spouse
• You have children who are dependent on your income
• You have an ageing parent or relative who depends on you for support
• You have another loved one you want to provide for
• You have business or estate planning needs
• Your pension and savings are not enough to protect your loved ones from the rising cost of living.

What different kinds of life insurance are there?

The two major types of life insurance are protection only (term), and investment type (whole of life). Please view our advice guide for more information about the different types of term and whole life policies which are available.

Why term insurance is sometimes called temporary insurance?

This is because it is arranged over a fixed time period, which has to end on expiry, rather than over your whole life.

What is the difference between increasing term and increasable term life insurance?

These two policy types are similar, in that both make allowances for the increased costs you may wish to cover for over the period of a policy.

Increasing term automatically raises the premiums by a pre-set amount. This may be a fixed percentage each year, or it may be set according to current levels of inflation.

With an increasable term policy, you have the option of increasing your premiums at certain times, such as on the anniversary of policy, or when and certain events take place.

With both policies, the amount covered will increase in proportion to the premium. For example, if you have a policy for £100,000, and you increase your payments by 5%, your cover will also increase by 5% to £105,000.

Is there also decreasing term life insurance? Why might I want this?

Yes, a decreasing term life-insurance policy allows you to reduce your premiums over a period of time, resulting in a smaller benefit being payable. This may be useful to if you are taking out a life insurance policy to protect your mortgage payments, as the amount you owe your bank or building society will reduce each month throughout the term.

Is it possible to have my life insurance policy pay out a continuous monthly income, rather than a lump sum?

Yes, this is usually done in the form of a family income benefit policy. This allows you to have an insurance policy which will pay your family a monthly sum to replace your wages in the event of your death, or you becoming seriously ill. These policies often have lower premiums than lump sum type policies, as the payouts are made over a period of time, rather than the insurer having to pay out instantly.

How do life-insurance premiums vary between men and women?

Women typically live longer than men by around five years, and are less likely to die early from road or other accidents. Therefore premiums are usually slightly lower for women than for men, if all other factors are equal.

How will my age affect the premiums which are paid?

Statistically you are closer to death the older you get (an unfortunate fact of life!). Premiums for life insurance could be up to 10 times higher for someone aged 60 than for someone in their early 20's.

How will my life insurance policy relate to any other insurance or investments that I have?

When you are considering your life insurance policy, you may wish to consider its relationship with the following financial products:

• Mortgages: Life insurance is often taken up to protect your mortgage payments; therefore most policies should at least cover the full amount of your mortgage loan.
• Investments: Whole life insurance policies are available as investment vehicles, which will payout when you reach a certain age, or if you die before this date. These should be considered as part of an overall investment strategy, which may include ISAs, savings or individual stocks & shares.
• Personal Loans and credit cards: You should always consider having a policy which will cover any amount you have owing on your loans or credit cards, in order to protect your other assets from being seized by your creditors in order to repay these debts.

Can I take out a life insurance policy in conjunction with my partner?

Yes, this is known as a joint life policy. However, you should be aware that such a policy may only be useful if you have similar incomes. If one partner has a significantly higher income than the other, then it is usually wise to take out separate life insurance policies for each individual.

How much should I insure my life for?

You can insure your life for however much you think it is worth, as long as there is someone willing to underwrite the policy. Most people take out a policy that is worth between six and eight times their annual salary. For example, if you earn £20,000 per year, you would be taking out £120,000 to £160,000 worth of insurance.

The more insurance you take, the higher the monthly premium. It is also important to remember that your policy will only pay out when you die - there is no way to retrieve the money otherwise.

As with any financial product, it is always worth shopping around to get the best quote, and thinking carefully about what the cover is for - is it just for the mortgage or is it for other things as well?

Remember that many endowment mortgages include an element of life insurance, so your mortgage would actually be paid off anyway if you were to die before the end of the mortgage term.

Q: I am diabetic. How does this affect my life insurance policy?

A: This is a very serious condition, which can reduce your life expectancy, and you may be prone to complications which can cause other illnesses or conditions. Therefore many insurance companies are unable to cater for diabetics, or will only make insurance policies available at very high premium levels. This will obviously depend on the nature and severity of your condition.

Q: Is life insurance available to smokers?

A: Yes, although all insurance underwriters will charge you higher premiums due to the higher overall life risk involved, even if you are otherwise healthy.

Q: Will my premium be reduced if I cut down or give up smoking?

A: If you give up, most premiums will be reduced after you have stopped using all tobacco products for a period of at least 6-12 months.

For death benefit only policies, you may only be asked to give a yes or no to the question "Do you smoke". For critical illness policies, some insurance companies may ask about how many cigarettes you smoke each day, and the type. They may reduce your premiums if you can show a significant reduction in consumption.

How will my state of health affect my life insurance policy?

Some life insurance policy providers will ask you to fill in a health questionnaire, or may require you to take a medical. This is more likely when a critical illness benefit forms part of a policy.

Certain life styles and health conditions are likely to dramatically increase your premiums, or make getting cover difficult.

These may include:

• Activities such as smoking, heavy-drinking (above 28 units per week for men, or 21 for women), and certain higher-risk jobs and hobbies.
• Health conditions such as hypertension, clinical obesity, heart defects, diabetes, and certain disabilities.

Your life insurance application form says that you must be in good health in order to apply. How do you define good health? "Good health" usually means that you are not regularly taking any prescription medicine, beyond minor treatments such as hayfever remedies, and that you have not taken more than 2 weeks off work due to sickness in the last 12 months. You should also be in a reasonable state of physical fitness, and have no mobility problems.

It does not, however, mean that you have to be "super-fit", "teatotal", or "as thin as a rake". Life insurance companies are used to dealing with a wide range of clients in varying states of health, and very few people have never experienced any kind of health problems.

Joint Life Policies

Instead of you and your partner taking out separate insurance policies, you could take out a joint life policy. A 'first death' policy covers both your lives and pays out once on the death of the first of you to die. A 'last survivor' policy pays out once on the death of the second of you to die. For protecting dependants, the 'first death' option is usually the more appropriate. A joint life policy will be suitable only if you both need to insure for the same amount. For example, a joint life policy may be ideal for paying off a mortgage in the event of one of you dying, but less suitable as a means of replacing lost income since the income needs will vary depending on which of you has died.

Writing Life Insurance in Trust

If the proceeds of a life policy are paid to your estate on death, there can be a long delay before the money becomes available to your dependants and there could be inheritance tax to pay on the proceeds. Writing an insurance policy in trust avoids these problems by ensuring that the policy pays out direct to your dependants, bypassing your estate altogether.

Most insurance companies give you the option of writing a policy in trust at no extra charge and have standard forms for doing this. Policies on your life (but not joint life policies) which are to benefit your husband, wife or children can be very simply and easily written in trust using the Married Women's Property Act 1882. The form of trust set up under the terms of this act cannot be altered later, so you need to make sure that it really does suit your requirements.

Life-of-Another Policies

An alternative is a policy that pays out direct to someone else if you die. For example, if you want to ensure that your husband or wife, or unmarried partner is financially secure if you were to die, you should consider one of these options:

• Own-life policy: You take out life insurance to pay out on your own death. To prevent the payout forming part of your estate and to avoid delays, you write the policy in trust for the benefit of your spouse or partner.
• Life-of-another policy: Your husband, wife or partner takes out life insurance based on your life. If you die, the policy pays out direct to him or her, so there is no need to write the policy in trust.

With all types of life insurance, at the time the policy is taken out you must have an insurable interest in the life of the person covered. This means that you must stand to lose financially if he or she were to die. You are assumed automatically to have an unlimited insurable interest in your own life and in that of your husband or wife. When it comes to other people, your insurable interest is limited to the amount that you would lose if they died. Therefore, a life-of-another policy cannot be taken out on someone with whom you have no financial connection.

The main disadvantage of a life-of-another policy is if your relationship breaks down: your former spouse or partner owns the policy and has the absolute right to the proceeds if you were to die.

You may need to take out your own policy to ensure that any children would be financially provided for. On the other hand, where a relationship has already broken down, a life-of-another policy taken out by a parent, with care of the children on the life of the absent parent, can be useful as a way of protecting the family against the loss of maintenance payments in the event of the absent parent dying.

Waiver of Premium

Both term insurance and whole-of-life policies may include 'waiver of premium'. This lets you suspend your premiums for a certain period in specified circumstances: for example if you are unable to work because of illness. You need to check the policy wording carefully to see precisely what conditions apply. Not all policies offer the waiver. With those that do, the waiver is sometimes automatically included and sometimes an optional extra. Typically, it could increase your premiums by around 6%.

Waiver of premium is a relatively cheap and straightforward way of making sure that your life cover would continue even if your finances were temporarily strained.

Protect Your Family

Your top priority if you have dependants is to ensure that they are protected financially if you were to die or be unable to work for a prolonged period. Here we concentrate on the role that life insurance can play in your financial plan.

Bear in mind that not only the loss of a breadwinner's salary could cause financial hardship: if you are caring for children, your spouse or partner might need to pay for professional childcare and/or babysitters if you were to die. Similarly, you should take into account any extra costs of running the house, maintaining the garden, and so on. A nation-wide government survey found that housework, still done mainly by women today, takes up more hours each day than paid work. If all the cooking, cleaning, childcare, gardening, and so on had to be paid for at the market rates for each activity, they would be worth some £340 billion, about half of the UK Gross Domestic Product.

Having identified that you need some life insurance, the next step is to work out how much. You might require a lump sum, for example to pay off the mortgage, as well as replacement income, which could be provided either by income-paying life insurance (known as family income benefit) or by insurance which pays out a lump sum which you could invest to produce the required income. To find out the basic cash and income your family would need in the event of your death, use the calculator to check.

Lump-sum Term Insurance

You choose what level of cover you need and the period for which you require it, e.g., until the children have finished their education, or beyond the time when Great Aunt Florence can reasonably be expected to rely on your support. The lump sum is paid out tax-free if you die within that term.

The premiums you pay are set at the time you take out the policy and depend largely on the level of cover, the term you choose, your age at the start and your state of health. You will normally be charged more - or even refused cover, if your work, hobbies or lifestyle are deemed to be particularly risky. Some insurance companies reserve the right to increase the premiums, often substantially, if they experience unusually high levels of claims against their term insurance policies. This is a device that was adopted in response to the problem of deaths through AIDS.

Tip: Overall, term insurance is the cheapest way to buy large sums of life cover to protect your family. A maximum protection plan might be cheaper in the early years, but watch out for premium increases later on.

Increasing term insurance

This works much like the basic term insurance, except that the level of cover increases - and usually the premiums too - for example by five per cent a year or in line with inflation. It is worth considering this type of policy, especially if you are insuring for a long term, because increasing prices eat away at the value of a fixed level of cover.

Increasable term insurance

This variant gives you the option to increase the level of cover either at set intervals, such as on each anniversary of taking out the policy, or when particular events occur, e.g. marriage, or the birth of a child. You pay extra in premiums for any increase in cover, but the premiums are worked out on the basis of your health at the time you first took out the original policy, even if your health has subsequently deteriorated.

Decreasing term insurance

With this variant, the amount of cover reduces year by year. The two main uses for this type of insurance are to repay loans, such as a mortgage, or to cover a potential inheritance tax bill on a lifetime gift.

Renewable term insurance

This version allows you to extend the insurance term when it comes to an end. The premium you then pay is based on your health at the time you took out the original policy, even if your health has subsequently deteriorated. This can be a useful variation for dealing with the unexpected, for example a child who stays in full-time education for longer than you had anticipated.

It is also a good option if you cannot, at present, afford the level of cover you need for the period you want. Instead, you could take out the cover you need but for a shorter period. At the end of the period, you could take up your option for a further period. Premiums would then be higher because you would be older, but there would be no additional charge even if you had developed health problems.

Convertible term insurance

With this type of term insurance, you have the option at specified dates to convert your protection-only policy into an investment type insurance policy based on your health at the time you took out the original term insurance. This option is of limited use.

Family income benefit insurance

Instead of paying out a single lump sum, this type of term insurance pays out a series of regular tax-free lump sums that you can use as income. The income starts to be paid at the time of death until the end of the policy term. Since the policy pays out less overall the longer you survive, this is generally the cheapest form of term insurance and can be a good choice for families. A useful variation allows the regular income to increase over time to counteract the effects of inflation.

Pension-linked term insurance

If you are eligible to contribute to a personal pension or stakeholder scheme (other than one simply used for contracting out of part of the state pension scheme), you are also eligible to take out pension-linked term insurance. With a personal pension, in 2000-1, you can pay up to 5% of your 'net relevant earnings' (basically, your earnings if you are an employee or your profits if you are self-employed) towards pension-linked term insurance. You can do this even if you are not actually making contributions towards your pension.

From 6 April 2001 onwards, the rules change. From that date, you can use up to 10% of whatever you actually contribute to your personal pension or stakeholder scheme to buy pension linked term insurance. This means you must be paying towards a pension to be eligible for the related term insurance.

The big advantage of taking out this type of term insurance is that you get tax relief on your premiums at your highest rate of income tax. The drawback is that what you pay towards any term insurance reduces the amount you can put towards a pension.

One should not assume that pension-linked term insurance will always be the cheapest cover. You should always compare it with the premiums payable for ordinary term insurance too.

If you are in an occupational pension scheme, you will often get some life cover through the scheme. Usually, the most this can be is four times your salary. If your scheme offers less than the maximum cover, you may be able to increase it by paying additional voluntary contributions (AVCs) either to an in-house AVC scheme or a free-standing scheme.

In either case, what you pay qualifies for tax relief at your highest rate, but does reduce the maximum you can pay towards your pension.

Tip: If you cannot afford the amount of life insurance cover you need, you do not necessarily have to insure for less. Consider taking out the full cover but for a shorter time, using renewable term insurance, which guarantees that you can take out a further policy at the end of the original term when you may be able to afford to pay more.

Critical Illness cover

If your doctor diagnosed you today with cancer, a heart problem or suffering from a serious illness, would it turn you from being independent to becoming reliant on others?

According to the Imperial Cancer Research Fund found in 1999, 1 in 3 people in Britain will be diagnosed with cancer at some point in their life.

The one-off lump sum payment you receive from critical illness cover and life insurance policies are designed to help support you adapt to these major life-changing illnesses. If you have a stroke, you may need to adapt your car or buy a bigger car to make it easier to get around. After recovering enough from illness you may be unable to get the same job you previously had so you may need funds to retrain for a different occupation.

We would recommend you include critical illness cover with term life insurance in your mortgage protection policy so if should the worse does happen you'd have cover. Critical Illness Cover protects you financially by paying a lump sum if you're diagnosed with any of these specified illnesses; cancer, heart attacks, strokes, permanent and or total disability, paralysis, major organ transplants and coronary artery bypass surgery. If you have taken critical illness cover your mortgage payments will be repaid for you.

Over the last few years’ critical illness insurance in the UK has become more popular, mainly due to the large increase in coronary problems. Over the last decade, workers in the UK have begun to work longer and harder than most European countries, resulting in more stressful lifestyle, compared to that on the continent. As a result of this increase, a large percentage of men in the UK will die of a heart related problem. The second most common cause of death is cancer which is also increasing in the United Kingdom.

Mortgage Protection

There are two ways to protect your mortgage:

1) Cover your mortgage for Life and/or Critical Illness Insurance

This type of insurance is designed to pay off your mortgage in the event of death or a critical illness. If your mortgage is in joint names it would be normal to take out a policy in joint names where the policy would pay out on the first death. The idea is that you do not leave your partner with a mortgage to pay in the event of death.

Tips

To have critical illness insurance it is more expensive so it is best to get two quotes, life cover with and without critical illness, so that you can see the two costs and make a decision on taking life insurance only or life insurance and critical illness.

If you have a repayment mortgage you would generally go for decreasing term insurance where the death benefit reduces along with the mortgage. Decreasing term insurance is cheaper than Level term insurance.

If you have an interest only mortgage you would need level term insurance, here the death benefit remains the same throughout the term of the mortgage.

Life insurance premiums have reduced in recent years so it is always worth checking that you still have a competitive premium as changing your policy is relatively easy and could save you money. However never cancel an existing policy until your new replacement plan has started.

2) Mortgage protection in the event of accident sickness and redundancy

This is where you take out a plan to provide a monthly benefit sufficient to cover your mortgage and possibly additional bills if you are unable to work due to accident or sickness or you have been made redundant.

To obtain a quotation you just need to know the amount of cover required, i.e no personal details required at this stage, then if you wish to proceed you can buy this product online through our recommended provider.

Tips

Many lenders offer this type of plan but it can often be expensive, so always seek an alternative quotation, if you have existing cover it is also worth getting an alternative as you could save on the monthly premium.

If you are self employed, get a quote without redundancy insurance as you could be paying a premium for redundancy without being able to make a claim.

Income Protection Insurance

It is estimated that you are 20 times more likely to be off work for six months because of sickness or injury than you are to die before reaching retirement. Few people question the need for life insurance to protect their dependants if they were to die, but only one working person in ten has any specific long-term financial protection if they are unable to work because of sickness.

Government figures show that about one in five people report having an illness or disability that limits their activities and about two million people each year claim benefits for long-term sickness or disability. Few people would find it easy to cope with the financial impact of a prolonged illness. So, why is this area of financial planning so often neglected? There are three main reasons:

• A mistaken belief that the state and employers will provide. A 1998 survey by Norwich Union Healthcare found that a quarter of the UK workforce believe they would receive their full salary from their employer or be supported by the state if they fell ill.

• A lack of understanding about how you can arrange protection privately. This is not helped by the somewhat obscure name 'permanent health insurance often given to the main tool for protecting your income.

• The relatively high cost of this form of protection.

Life Insurance Glossary - Terms defined:

Convertible Term:

A form of term life insurance which pays out the sum insured only in the event of death or critical illness during a specified period, but may also be converted into a whole of life or savings plan at a later date if desired.

Critical Illness Only:

This kind of life insurance pays out the sum insured only on diagnosis of the insured person having contracted one of a range of specified critical illnesses. These illnesses usually include heart disease, stroke, and cancer.

Death Benefit Only:

Pays out the sum insured only in the event of death.

Death or Earlier Critical Illness:

Pays out on the earlier of death or diagnosis of a critical illness.

Family Income Benefit:

Pays out a regular annual income (actual payments can be half yearly, quarterly or monthly) in the event of death or diagnosis of a specified critical illness, during a specified period.

Increasing Benefit:

Increasing benefit is a form of protection against inflation. If you include increasing benefit option on your quotation, the benefits on the plan would increase each year in line with inflation or an agreed factor to give you this protection.

Mortgage Protection:

Pays out a reducing sum insured over a specified period in order to repay a capital & interest repayment mortgage in the event of death or critical illness.

Product Type Term:

Pays out the sum insured only in the event of death or critical illness during a specified period.

Unit Linked Policy:

This is where the premiums you pay go into an investment fund which is divided up into units. The value of your policy depends on how the price of these units moves and that, in turn, depends on the value of the underlying investments in the fund.

Waiver of Premium:

Waiver of Premium is a form of protection which provides that if you cannot follow your normal occupation because of illness or injury, the insurance company will pay your premiums to maintain the benefits under the policy.