If you have family or dependents that you’d like to make sure are looked after when you die, you should consider getting life insurance. The average cost of life insurance is £38 per month, but can be as little as £5 per month. But not all life insurance is equal – find out about the different types of life insurance available, how much they cost and how to work out how much life insurance cover you need in our guide.

How does life insurance work?

Most life insurance works by paying out a lump sum if you pass away during the policy term. Some insurance providers will also pay out if you’re diagnosed with a terminal illness. How much money your policy pays out will depend on the level of cover you chose to take out at the time.

Life insurance is usually used as a way to help your family with living costs after you’re gone. So you may choose to buy a life insurance policy that will cover your mortgage so your family can pay it off and stay in your home when you die.

There are a few different types of life insurance which we’ll explain in more detail later, but they are called level term, decreasing term and whole life. Which one is right for you will depend on what you want the payout to be used for.

How much does life insurance cost?

How much life insurance costs depends on a few things, but the average monthly premium in the UK is £38. However, there are different types of life insurance, each offering varying levels of cover, and they will differ in price:

Insurance type	Average monthly cost
Level term	£12.50
Decreasing term	£19
Whole life	£62

These prices are averages, so your own life insurance policy could cost much less or much more – in fact, some policies cost as little as £5 per month. So what affects the cost of a life insurance policy?

Policy type: Term life insurance runs for a specific amount of time, while whole life insurance doesn’t expire. That means that if you die after your term policy runs out, your beneficiaries won’t receive a payout, but with whole life insurance, they will. Because of this, whole life insurance is usually more expensive.

Level and length of cover: As you’d expect, the more money you’d like your policy to pay out, the more it costs. And the longer you want your policy to run for, the more you’ll pay in premiums.

Your age: One of the main factors affecting the cost of your life insurance policy, the older you are, the more expensive your premiums will be. If you take out life insurance when you’re younger, your insurer can be more confident that you’ll be making payments for longer before they need to pay out, so it’s often cheaper.

Your lifestyle: Life insurers will want to know if you smoke, whether you drink alcohol (and if so, how much), and may even ask you if you have any points on your driving licence. They’re looking at your attitude to risk, and if you’re a heavy smoker and/or drinker and have got a few points for speeding on your licence, they’ll consider you more likely to die early.

Your health: You must declare any pre-existing health conditions when you take out a life insurance policy. If you don’t, you risk preventing your policy from paying out when you die. Unfortunately though, that means you’ll probably pay more for your insurance, as those with health conditions are considered more at risk of dying early. You’ll also pay more if your BMI (Body Mass Index) is out of the normal range.

Your family health history: As well as your own health history, insurers are interested in your family health history. If things like strokes or heart attacks run in your family, you might pay more for your life insurance, particularly if these conditions resulted in your family members dying at a young age (usually under 65).

Your job: If you’ve got a dangerous job, your life insurance premiums may be higher. People who work in office jobs usually won’t be affected, but if you work in industries like the armed forces, construction or the emergency services, you may be considered at a higher risk of dying early.

Types of life insurance

There are three main types of life insurance that you need to consider:

Level term

Level term life insurance is a policy that pays out a specified lump sum when you die. People often use level term life insurance to leave their family members or beneficiaries with a sum of money that they can use for funeral costs and for living costs moving forward.

When you take out a level term policy, you’ll specify the amount you want the policy to pay out in the event of your death and how long you want the policy to run for (the term). If you die after the term ends, your family won’t receive any money.

Decreasing term

Decreasing term life insurance cover reduces each year. It’s designed to be used to pay off a repayment mortgage, where the outstanding loan decreases over time. This is usually the cheapest type of insurance policy you can get, as the longer you’re alive during the term, the less the insurer will have to pay out. Your premiums stay the same throughout the policy.

Whole life

Whole life insurance is exactly that – it covers you for your entire life. This means that these policies are the most expensive, as it’s the only insurance that’s guaranteed to pay out! Your beneficiaries will receive a lump sum when you die, and these policies are usually used as a way to help with Inheritance Tax (IHT). If you write your policy into a trust, it won’t be affected by Inheritance Tax. This could keep your estate below the IHT threshold (currently £325,000), or help cover the costs of inheritance tax on your estate.

Some whole life insurance policies can be linked to an investment, which means that you can cash in some of its value as the fund grows. Your beneficiaries will still get the lump sum when you die, but it allows you to make withdrawals when you’re still alive without affecting this lump sum.

It’s important to note that there’s a risk that if you live a long time, you could end up paying more on the whole life policy than it will pay out. It’s always worth talking to an insurance broker or financial advisor before taking out a whole life policy.

What is the difference between life insurance and life assurance?

You might have heard the terms life insurance and life assurance used interchangeably, but they are slightly different. The main difference is that life assurance covers you for your whole life (so is an alternative name for whole life insurance), while normal life insurance only covers you for a set term.

As we’ve just discussed, life assurance or whole life policies tend to be the most expensive, as they’re guaranteed to pay out. Some policies will allow you to stop making payments towards the end of your life, but this is usually as old as 85. You can also choose to add indexation to a life assurance policy – that is, it’s linked to inflation so your family still get the same value lump sum even if inflation rises sharply.

What is covered by life insurance?

Essentially, life insurance covers your life, but certain policies will cover different things.

Decreasing life insurance is usually used to cover the cost of a mortgage, as the outstanding loan will reduce over time, while a level term policy is more often used to cover everyday expenses like bills, rent or childcare costs.

It’s also possible to add critical or terminal illness cover to your life insurance policy. This gives you extra cover that you can use while you’re still alive. Critical illness cover will pay out if you are diagnosed with a specified illness to help you with the costs of your mortgage or bills while you’re unable to work. You could also use the money to help pay for treatment. Terminal illness cover will pay out while you’re alive if you have a terminal illness with a limited life expectancy (usually less than 12 months), which can help take away the stress of money at a difficult time for you and your family.

Why should I have life insurance?

Life insurance allows you to leave something behind for your loved ones. It can help take away any financial stress while they’re dealing with your loss, which is the main reason why people take out life insurance.

There are a few situations that can help you decide whether you should have life insurance:

• You have dependents – such as school-age children

• Your partner relies on your income

• You have a mortgage – a life insurance policy can pay this off for your family if you die

• Your family would struggle to pay for your funeral, which can cost thousands of pounds

• Your beneficiaries will be subject to Inheritance Tax – a life insurance policy could cover the bill so they get to keep everything you intended to leave to them

How much life insurance do I need?

How much life insurance you need will depend on you and your family’s circumstances, for example who depends on you financially, what their living costs are and what other income they will have when you’re gone.

Consider what you want your cover to be for to help you decide how much you need:

For a mortgage or debt: Add up everything you owe and add a buffer for any taxes, then decide whether you just need decreasing term cover or still want level term cover.

For income replacement: Some experts say that it’s a good idea to take your annual salary and multiply by 10 to get a good amount of cover to leave your dependents with. However, you may also want to consider thinking about how much annual income your dependents would need and how long they’d need this to last, and taking out cover for that amount. A financial advisor will be able to help you work it out.

What age should you get life insurance?

It’s best to get life insurance as young as possible, as it reduces your monthly premiums. However, if you have no financial dependents, are single and don’t own a home, there’s probably not much point in taking out life insurance until this changes.

How long should you take life insurance out for?

How long you should take life insurance out for will depend on your circumstances. Consider what the cover will be used for to help you make your decision.

If you have a mortgage and the term lasts for 26 years, you could take out life insurance for this period to ensure there’s money to pay off the mortgage if you die during the term.

If you have children, you might want to have life insurance in place until your youngest is likely to be financially dependent – although this typically used to be 18, or older if in higher education, many people choose to have cover in place for longer now due to the cost of living being so high.

What is the cheapest way to get life insurance?

1. Check what cover you already have

Don’t insure yourself for more than you need. Many employers offer cover, and some mortgages come with life insurance policies too.

2. Lock in a price when you’re younger

As soon as it makes sense to get life insurance, buy it – your premiums are usually lower the younger you are, and they stay the same throughout the policy, so lock in a low price while you can.

3. Consider term life insurance

Term life insurance is much cheaper as it’ll only pay out if you die within the set period of time. If you only need cover if you die within your mortgage term or while your children are dependent on you, consider this type of cover of whole life insurance.

4. Improve your risk factors

If you smoke or drink heavily, consider giving up or reducing your intake – it will make your premiums much lower. And if you have a dangerous hobby, such as skydiving, you may want to consider whether the risk is worth it.

5. Compare quotes

One of the best things you can do to get cheaper life insurance is to compare quotes to make sure you’re getting the best price possible. We’ve partnered with Quotezone.co.uk and Unbiased to help you save money on your life insurance – get quotes now and see how much you could save.

Disclaimer: This information is intended for editorial purposes only and not intended as a recommendation or financial advice.

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