Life insurance: the complete guide

Learn what life insurance is, how much it costs and if it's the right thing for your personal situation

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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 rely on your salary.

Your family will be able to spend the money on whatever they want.

People often prioritise paying:

  • the mortgage

  • household bills

  • debts

  • childcare or education costs

  • funeral costs

Life insurance is not the same as life assurance. They both pay out when you die but the premium structure is different.

How does life insurance work?

You pay most life insurance policies in monthly premiums. When you buy a life insurance policy you’ll choose who’ll get the life insurance payout. This is a 'death benefit'.

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Do I need life insurance?

You do not have to have life insurance. But it’s a good idea to have it if you:

  • are married

  • have a joint mortgage with your partner 

  • have children

  • have other people that rely on your salary such as elderly parents

It’s also useful for stay-at-home parents. This is because if they died the 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.

You can get quotes or compare life insurance from other life insurance companies or financial advisers.

If you’re single and do not have children or anyone that relies on your salary, life insurance might not be best 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 often.

Mortgage and living costs are rising so the amount of coverage you need might change. This amount is the “sum assured”.

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

  • getting married

  • having children

  • changing jobs

  • moving house

  • divorce

Some employers offer life insurance as an employee benefit. This is a “death-in-service” benefit.

Like life insurance, this pays out a lump sum if you die while in employment. It often multiplies your salary by a certain amount such as 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.

The more protection your life insurance policy offers, the higher your premiums. Cheap life insurance might not offer enough cover.

When you buy life insurance you might only want to cover your mortgage payments, household bills and family expenses.

But think about how long your family will need cover for. It might be until you pay the mortgage off, children leave home or until your partner retires.

More about life insurance

You can hold more than one life insurance policy. Your beneficiaries can claim from all the life insurance policies you have if you die.

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

When you take out life insurance, the provider will ask you questions. It’s important to answer them honestly.

If you do not tell us something you know, it's a “non-disclosure” and could mean your claim is turned down.

Most life insurance policies do not pay out if you commit suicide in the first 12 months of taking out the policy. But most will after this initial period is up.

This protects insurers from people who take out large policies then take their lives to get out of financial trouble.

Insurers may turn down claims involving suicide if the mental health of the person on the policy is not shared.

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. It is legal to avoid by putting your life insurance policy in a trust.

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.

With a decreasing term life insurance policy, the amount that gets paid out on death falls each year. It'll fall until it is zero at the end of the policy's term.

It is often used to protect mortgage repayments. The more repayments you have made before you die, the less you'll have left for the policy to pay off. 

Decreasing term life insurance is cheaper than term life insurance.

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

It’s more expensive than term insurance.

You do not have to take out life insurance to get a mortgage.

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

Many couples take out joint life insurance, as it is often cheaper. This type of policy normally only pays out once, when the first person dies.

The surviving partner will need to take out another policy to protect someone who relies on them financially.

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