INSURANCE GUIDE
Life Insurance UK
The main types of UK life insurance, what each covers, and how to choose the right policy for your situation.
TL;DR
- Term life insurance pays a lump sum if you die within the policy term - the most straightforward and affordable type.
- Whole of life insurance guarantees a payout whenever you die - it is more expensive but has no expiry date.
- Decreasing term insurance reduces in line with a repayment mortgage - often used specifically for mortgage protection.
- Critical illness cover is a separate product that pays on diagnosis of specified serious conditions, not only on death.
Level Term Life Insurance
Level term life insurance pays a fixed lump sum if the policyholder dies within the agreed policy term. The sum assured and premium remain fixed throughout the term. It is the simplest and usually the cheapest form of life cover, making it appropriate for most people who want to provide a financial safety net for dependants over a specific period - while children are young, while a mortgage is outstanding, or while a business partner is dependent on the key person. If you survive the term, the policy expires and no benefit is paid.
Decreasing Term Insurance
Decreasing term insurance pays a sum that reduces over the policy term, typically in line with a repayment mortgage balance. It is specifically designed for mortgage protection - if the policyholder dies, the payout clears the outstanding mortgage at that point. Because the cover decreases, premiums are lower than level term. It is not appropriate for protecting income or providing a legacy - only for covering a specific reducing debt.
Whole of Life Insurance
Whole of life insurance pays a guaranteed sum on death whenever that occurs - there is no expiry date. Premiums are significantly higher than term insurance because the insurer will always pay a claim. Whole of life policies are used for: inheritance tax planning (placing the policy in trust to provide funds for an IHT bill); funeral cost planning; and situations where a guaranteed payout is needed regardless of the age of death.
Joint vs Single Life Policies
Life insurance can be arranged on a single life basis (pays on the death of one person) or on a joint life basis (pays on the first death of two people, typically a couple). Joint policies are typically cheaper than two single policies but only pay once - leaving the survivor without cover. Two single policies cost more but provide independent cover for both lives and pay out twice if both policyholders die.
Writing a Life Policy in Trust
Life insurance proceeds paid to the estate on death are subject to inheritance tax if the estate exceeds the nil rate band. Writing the policy in trust removes the payout from the estate, avoiding inheritance tax on the proceeds. Trust policies also pay out faster - within days rather than waiting for probate. Most insurers offer simple trust documentation at no additional cost when the policy is taken out.
Disclaimer
This guide is for general information only and does not constitute financial or insurance advice. Kaeltripton.com is not regulated by the FCA. Always read policy documents in full before purchasing cover.
Frequently Asked Questions
How much life insurance do I need?
A common starting point is 10 times annual income, but the right amount depends on your specific circumstances: outstanding mortgage balance, number and age of dependants, existing savings and investments, and whether your partner works. Adding up the debts you want cleared and the income you want replaced for a specified period gives a more accurate indication than any rule of thumb.
Does life insurance pay out for suicide?
Most life insurance policies exclude death by suicide within the first twelve to twenty-four months of the policy - this is a standard exclusion to prevent policies being taken out in crisis. After this initial exclusion period, most policies do pay out for death by suicide on the same basis as any other cause of death, subject to the policy terms. Check the specific exclusion period in your policy schedule.
