Life insurance is often perceived as complicated, but in reality, the concept and the products are very simple.

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  • In short, a life insurance policy protects your loved ones in the event of your death and subsequent loss of income. 

    Why should you get a life insurance policy?

    Think about the immediate and longer term impact of the loss of your income. When a loved one dies, coping with the loss is hard enough, without the added complication of dealing with the financial loss as well. A life insurance policy works by providing your family or loved ones with financial protection after you are gone. It also provides you with the peace of mind that you are adequately protecting your family should the unthinkable happen during the term of your cover. Getting the right life insurance product is therefore very important and is particularly crucial if you are the sole, or main, income earner in the household.

    What life insurance products are available?

    Life insurance products generally fall into two categories: level term insurance and whole of life insurance.

    Level term policies

    A level term insurance policy is the most prevalent form of life cover. It is also a relatively cheap means of protecting your loved ones in the event of your death. The policy works by the policy provider paying the beneficiaries a tax-free lump sum in the event of your death, if this occurs within the agreed term of the policy. The majority of policies run for around 10 to 15 years, or even more. If the term of the policy runs its full course and no claim is made, the policy becomes null and void and you are not entitled to any kind of rebate. At this point you will need to take out a new life insurance policy to start your cover again.

    The premiums you pay are fixed for the term and will not rise. However, the policy does not take inflation into account and should you die near the end of the term, the amount paid out will be what you agreed at the time of arrangement. However, one option could be to link the life insurance policy to some kind of inflationary index. This means that the sum you are insured for rises over time in line with inflation. This is popular with longer term policies, though your premiums will be naturally higher than if you opt for a basic level term insurance policy.

    Whole of life policies

    A whole of life policy differs from a level term policy in that the insurer is guaranteed to pay out you whenever you die and not just within an agreed term. Because the payout is guaranteed (subject to the conditions), this type of cover is much more expensive than a term policy, as it often includes an investment element, too. However, you may be comfortable paying higher premiums because of the peace of mind that a guaranteed payout brings.

    Remember to calculate the annual premiums as well as the true cost over the whole period of the policy. The investment element of a whole of life policy tends to be used to reduce your premiums later on in the life of the policy and not as a savings vehicle in its own right. But be aware that if the investment underperforms, your premiums may increase. Your premiums will be reviewed every five years or so. Regardless, many advisers may recommend a dedicated investment vehicle for retirement alongside a separate term insurance policy.

    Can you avoid a payout being liable to inheritance tax?

    To avoid a lump sum payout being liable for UK inheritance tax, you can put it into a trust. This is usually an option on your application form. This should also increase the speed of a payout, with the funds going straight to the named beneficiaries, rather than being mixed up in your estate. If you are unsure in any way, or your affairs are fairly complex, you should seek guidance from a solicitor. You can find a solicitor now on Primelocation.

    What is critical illness cover?

    With virtually all life insurance policies, a critical illness element is available as an optional extra. This will cover you for a range of listed critical illnesses and will provide monthly payments to cover the loss of salary (subject to conditions) if you are unlucky enough to be diagnosed with one of these conditions and are unable to work. The payout stands even if you fully recover from the illness. This option will increase your premiums, but will provide you and your loved ones with even greater security. Read our Guide to critical illness cover for more information on critical illness policies.

    How much will your life insurance cost?

    The cost of life insurance will vary greatly from one life insurance company to another and across the different policies available. As mentioned previously, you can get a level term life insurance policy from just a few pounds a month, but the cost will depend on such factors as your age, occupation, whether you smoke or not, how much you want the payout to be, and any medicual conditions you currently have.

    You should always aim to get the most appropriate life cover with the lowest premiums. Given the nature of a level term insurance policy, the quotes are easily comparable across a range of insurers and there are numerous price comparison sites that can provide you with the opportunity of getting the best deal and allow you to apply online. If, however, your circumstances are more complicated, you should always seek advice from a financial adviser. Read more about When to use a financial planner or adviser.

    Related information

    Some information contained herein may have changed since it was first published. PrimeLocation strongly advises you to seek current legal and/or financial advice from a qualified professional. If you have any queries relating to the content, please email

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