Types of life insurance companies, policies and cover

Find everything you need to know about all the different levels of life insurance types and life assurance cover here.

Our guides cover life insurance companies, the various types of life insurance cover and how to manage your circumstances to get the cheapest life cover policy for your needs.

Need-to-know facts about life insurance policies

Use this guide to find essential information about life insurance.

For more information about some of the life insurance terms we use, click on the highlighted words.

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What different sorts of life insurance are available?

There are various types of life insurance policy available to suit different needs and situations:

Level term life insurance:

With level term life insurance, you choose the amount of cover you want and how long you want the policy to run for. If you die during the life insurance term — the period in which the policy is running — your insurer will pay the same amount you are covered for whether you are 10 or 10,000 days into the term.

If you set up a joint life policy (one life insurance policy to cover two people) the amount you are insured for is paid out if either of you dies. The life insurance policy usually stops when a claim has been paid. You can't cash in these life insurance policies.

Mortgage protection life insurance:

With mortgage protection life insurance, you choose the amount of life insurance cover you want and how long you want the policy to run for. The amount of cover reduces each month during the term of the policy and is calculated to be enough to cover the capital outstanding under a normal repayment mortgage. If you die during the life insurance policy term, your insurer will pay the amount due at that time.

If you set up a joint life policy (one policy to cover two people) the amount of cover is paid if either person dies. The policy usually stops when a claim has been paid. These life insurance policies can't be cashed in.

Level term life and critical illness insurance:

With level term life and critical illness insurance you choose the amount of cover you want and how long you want the policy to run for. If you die or are diagnosed with a critical illness during the policy term, your insurer will pay the amount you are covered for. The types of illness covered include heart attack, stroke, cancer and multiple sclerosis (the insurer will give the full list of illnesses covered in the policy's key features document).

If you set up a joint life policy (one policy to cover two people) the amount of cover is paid out if either person claims. The policy usually stops when a claim has been paid. These life insurance policies can't be cashed in.

Mortgage protection life insurance and critical illness insurance: 

With mortgage protection life and critical illness insurance, you choose the amount of cover you want and how long you want the policy to run for. The amount of cover reduces each month during the policy term and is calculated to be enough to pay the capital outstanding under a normal repayment mortgage. If you die or are diagnosed with a critical illness during the policy term your insurer will pay the amount you are covered for. The types of illness covered include heart attack, stroke, cancer and multiple sclerosis (the insurer will give the full list of illnesses in its policy's key features document).

If you set up a joint life policy (one policy to cover two people) the amount of cover is paid out if either person claims. The policy usually stops when a claim has been paid. These life insurance policies can't be cashed in.

Who can apply for life insurance cover?

Anyone aged between 18 and 69 who lives in the UK, Channel Islands or the Isle of Man can apply for life insurance. Getting life insurance cover will give you peace of mind as you know that your family will be taken care of when you die.

What length of life insurance policy should I choose?

Most people usually take out life insurance that lasts until some key date in the future. It could be when they intend to retire, when their mortgage is paid off, or when they feel their children may leave home. Working back from that date to now will help you decide the number of years for which you need life insurance cover.

Should I get a joint life or single life insurance policy?

Joint life insurance policies are available, but advisers will typically recommend two single life insurance policies as they usually cost hardly any extra and will provide double cover. (This means that if both people die together, both policies pay out, rather than just one joint policy).

Having this double life insurance can provide valuable extra cover to support surviving family members for very little extra cost.

Policies that include critical illness cover are almost certainly better split into two separate life insurance plans. For example, if one person is diagnosed with an illness like cancer, their partner will not want their insurance to be lost, which would be the case on a joint life, first claim policy.

What level of life insurance cover do I need?

It depends on your situation. You might want to consider some of the following:

• how would your financial dependants meet their bills without your contribution?

• have you provided enough money to pay off any mortgage you owe?

• do you need extra money to support your family (particularly if you have young dependants)?

What is a waiver of premium?

Waiver of premium is an optional extra that makes sure your monthly life insurance payments are met if you're unable to work, and so unable to keep up the payments on your life insurance policy.

Waiver of premium typically costs around 2.5% to 3.5% of the total premium. Some riskier professions (e.g. professional sports people) may not be able to take out this extra life insurance cover as insurers regard them as too risky.

Can life insurance cover my mortgage?

Yes. You can choose a level or reducing (mortgage protection) plan that pays an interest-only mortgage or repayment mortgage when you die.

You can also add insurance to help pay your mortgage if you have a long-term illness (which statistically is much more likely) and, if necessary, unemployment insurance too.

How do I make a claim on my life insurance?

If you have a living benefit (critical illness, income protection, waiver of premium or unemployment cover), then you should check the policy booklet to see how to claim.

If you need to make a claim on behalf of someone who has died, contact their life insurance company.

Who gets the life insurance money?

You get the money if you have a living benefit - e.g. critical illness cover, income protection cover, waiver of premium or unemployment cover.

If you die and your life insurance policy is in trust, the money goes to the trustees who pass it on to the beneficiaries of your policy. If you haven't put the policy in trust, the money goes to your estate and may be liable for inheritance tax.

If you have a joint life policy that isn't in trust, the money goes to the surviving owner of the policy.

Will the proceeds of my life insurance policy be taxed?

Both terminal illness and life insurance claims are usually paid free of income and capital gains tax. However, in some circumstances inheritance tax may be payable. You can normally help avoid this by putting your plan in trust.

Can I cancel my life insurance policy at any time?

Yes, you can cancel your life insurance policy at any time, but of course the cover will stop and you won't get any money back for the years you have paid out.

Will my life insurance payments change?

No. It's good practice for insurers to arrange life insurance policies with guaranteed premiums.

However, sometimes life insurance plans with critical illness cover included are reviewable. This should be clearly indicated and normally the premiums are not adjusted up or down for the first five years.

Glossary

Critical illness insurance/critical illness cover This is insurance that pays out if you develop one of the illnesses laid down in the insurance policy. These usually include things like cancer and multiple sclerosis. It's often combined with level term life insurance and mortgage protection life insurance.

Joint life policy A life insurance policy that covers two people.

Level term life insurance: Life insurance that pays out a fixed lump sum if a person dies within the specified period of the policy.

Level term life and critical illness insurance: Life insurance that pays out a fixed lump sum if a person dies within the specified period of the policy or if they develop one of the specified illnesses laid down in the policy while the policy is running.

Living benefit Living benefit means any life insurance that pays out when you are still alive — e.g. critical illness cover, income protection, waiver of premium and unemployment.

Mortgage protection life insurance This is life insurance cover where the sum to be paid reduces in line with what's outstanding on your mortgage.

Mortgage protection life cover Life insurance cover where the lump sum reduces in line with your mortgage balance and pays out if you die or develop one of the illnesses laid down in the life insurance policy.

Single life policy A life insurance policy that covers just one person.

Term The period that the policy runs for.

Waiver of premium An extra insurance you can take out to cover the cost of life insurance premiums in case you get ill or become unemployed.

*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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