Life insurance jargon buster

What is life insurance?

Life insurance cover provides a lump sum payment upon your death to help cover your bills and support your family if you die within the policy term. Life insurance takes many forms, and as with any financial product, some terms used can be confusing to those new to the subject.

Our jargon buster aims to simplify some terms associated with buying a life insurance policy, so read on to learn more or get started by comparing life insurance quotes below.

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Beneficiary, Critical illness cover, Death in service benefit, Existing medical conditions, Investment-linked life insurance (endowment policy), Joint life insurance, Living benefit, Mortgage protection insurance, Premium, Term, Term assurance life insurance, Level term, Decreasing term, Trust, Sum insured, Waiver of premium, Whole of life insurance.

Beneficiary

The beneficiary is the person you choose to receive the insured sum if you die during the term of the policy — for example you may choose for your spouse, child or other family member to benefit from your policy. You can choose to have more than one beneficiary.

Critical illness cover

Critical illness cover is offered as an add-on for life insurance policies — if you are diagnosed with one of the ‘defined’ serious illnesses specified by your insurer during your policy’s term, your insurer will pay a set amount to help support you and your family during your illness. Critical illness cover is an example of a living benefit, meaning you don't have to pass away for a sum to be paid out. Read more about critical illness cover in our guide.

Death in service benefit

A death in service policy is a benefit often offered by employers. The policy will usually pay out a multiple of your salary to your chosen beneficiary if you pass away while employed by the company.

Existing medical conditions

When arranging your life insurance policy, your insurer will ask if you have any existing or previous medical conditions that they need to be aware of. Some conditions (for example diabetes, epilepsy, history of cancer or stroke) may make it harder to find cheap life insurance, but failure to disclose these conditions can lead to your policy being invalidated. If you do have an existing or previous medical condition, your insurer may require you to undergo a medical examination before arranging your policy.

Investment-linked life insurance/endowment policy

An investment-linked life insurance policy is a form of life assurance, and is also known as an endowment policy. Your monthly premium will be split — some will go towards funding your final lump sum payout, and some will be invested by your insurance company. The value of your payout may go up or down depending on how well the investment performs, and in some cases you can ‘cash out’ your policy before you die. Investment-linked life insurance is a complex financial product and it’s recommended you speak to an independent financial provider if you are considering this type of cover.

Joint life insurance

Those with a shared financial interest (most commonly couples) can choose to take out a joint life insurance policy or two single policies. If you decide on joint cover you may benefit from cheaper premiums and less paperwork, but you should be aware that a joint policy will only pay out on the first death. This can cause problems if you and your spouse die at the same time — only one payment will be made whereas two single policies would result in two lump sum payments. The surviving spouse would also be left without cover after their partner passes away, so would need to take out a new policy if they want to be covered.

Living benefit

A living benefit is a policy that pays out while the policyholder is still alive — for example critical illness cover.

Mortgage protection insurance

Mortgage protection insurance is a form of decreasing term life insurance, specifically designed to cover the amount of debt you have outstanding on your mortgage.

Premium

The premium is the amount you pay your insurer for your policy, usually broken down as a monthly payment. It’s possible to get life insurance cover for a premium as low as £5 per month — compare with Uswitch to see how much a life insurance policy would cost based on your specific needs.

Term

When you take out life insurance, you will be asked to decide on a term — how long you want the policy to cover you for. You can choose for your cover to last for anything from a few years, to the rest of your life (in the case of whole of life cover).

Term assurance life insurance

The most common form of life insurance is term assurance, of which there are two types:

Level term: Level term insurance covers you for a set amount of time, for example 10 or 20 years. Most people choose their term based on how long they have left to pay off their mortgage or how long until their children reach a financially responsible age. With a level term insurance policy, the lump sum payment remains the same for the whole term. Read more in our guide to level term life insurance. 

Decreasing term (see also mortgage protection insurance): Decreasing term insurance is typically taken out to cover a large debt such as a mortgage, and the sum insured decreases as the debt is paid off. This level of cover tends to be cheaper than level term insurance, as the lump sum payment becomes smaller as time goes on.

Trust

Your life insurance sum is part of your estate — this includes your house, any savings and other assets. If your estate is worth more than £325,000 in total, your assets will be subject to inheritance tax. By setting up a trust you can avoid inheritance tax and bypass probate in certain cases. A trust is a complex financial product, so we advise you speak to an independent expert before deciding whether this is the right approach for you.

Sum insured

The sum insured determines how much your cover will pay out to your beneficiary if you die within the policy term. You decide how much to cover yourself for — you may choose an amount that will ensure your family can pay the mortgage in the event of your death, and you may want to take into account their living expenses and any luxuries. For guidance on how much cover to take out, read our guide: How much life insurance do you need?

Waiver of premium

Some life insurers offer the option to waive your premium in certain circumstances, meaning your insurance policy stays in place even if you can’t pay your premiums because poor health has prevented you from working, for example.

Whole of life insurance

As the name suggests, whole of life insurance provides cover for your whole life, rather than a set term. Whole of life insurance will pay out when you die, no matter when that is, as opposed to term insurance that only pays out if you die within the policy term. Because of this added protection, whole of life insurance tends to be more expensive than term insurance.

*Based on £150,000 of level-term cover for 25 years for a 30-year-old non-smoking male with no pre-existing medical conditions (March 2023)

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