A Guide to Life Insurance

Life insurance is one of the most overlooked areas of personal finance in the UK. The issue of underinsurance can lead to serious financial challenges for families and households. Here we’ll cover how life insurance works, what you should know about finding the cheapest quotes, and other details you should consider.

What is life insurance?

It’s a type of insurance policy designed to cover you in the event that you pass away. This might sound morbid, but it’s an insurance policy that deserves attention because it can ensure your loved ones receive a lump sum or regular payments to cover living expenses and costs if the worst were to happen.

How does it work?

You will arrange to take out a policy and pay a regular premium (usually a monthly payment) so your policy remains valid. If something happens and you die during the term of your policy, your insurer will pay out an agreed amount to your beneficiaries (perhaps a partner, children or other family members).

It’s a worst-case scenario insurance policy, but unfortunately, we all die at some stage. If you’re no longer there to provide for your family, it offers much-needed financial security for your loved ones at a challenging time.

Life insurance is particularly helpful if something happens unexpectedly where you may not have made any other contingency plans.

Types of life insurance policies

The three main types of life insurance are:

1. Term life insurance

This covers you during a fixed period of time - 10, 20, or 30 years for example. You’re only covered if something happens to you during the agreed ‘term’. A ‘level term’ cover means that the potential payout is fixed for the whole period.

Then there are variations such as ‘decreasing term’, where the payout reduces in line with something like your outstanding repayment mortgage balance. There’s also ‘increasing term’ cover, where the payout grows at a fixed rate or perhaps in line with inflation (sometimes called ‘index-linked’).

2. Whole of life insurance

This type of life insurance does what is says on the tin and provides cover throughout your whole life. So, a payout is guaranteed at some stage as long as you’re up to date with your insurance premiums (the cost of maintaining your policy).

However, the guaranteed nature of a payout means that whole-of-life insurance policies are usually more expensive than term policies.

3. Joint life insurance

With joint life insurance, two people can be covered under the same policy. This type of policy is useful for couples, especially if you have children. The basic way it works is that if either of you passes away, the policy will pay out to the surviving partner.

However, it’s important to understand the policy ends at this point. So, there’s no ongoing cover for the surviving partner. A joint policy means you just pay one premium (compared to two monthly premiums if you have individual policies). But, this doesn’t mean the price is halved, it can just be simpler to manage.

Additional cover for policies

Along with the main underlying type of life insurance policy, you’ll usually have the option to add on extras just like you might with other types of insurance. The key policy additions you can usually make are:

• Critical illness cover (CIC): Typically pays out a lump sum if you become seriously ill. Critical illness cover is extremely useful if you have to stop working. The payout is often a pre-agreed lump sum or calculated as a percentage of the underlying life cover. Different insurers cover various types of illnesses so it’s always worth understanding what’s covered and what isn’t.

• Terminal illness cover: If this cover is in place, it means your insurer will payout if you’re given a terminal diagnosis where there’s no known cure (or the condition is too late to be cured), and you have a life expectancy of 12 months or less. This is sometimes covered as a standard benefit with some life insurance policies.

Is it worth getting life insurance?

For most people, life insurance is not only helpful - it’s a crucial piece of financial planning. If you have a partner, dependents, or any other family members who rely on you, life insurance ensures that they aren’t burdened with additional financial stress during what might be the most difficult time of their lives.

The only situation in which life insurance may not be suitable is if you’re single and don’t have a partner, children, or dependents. And you have zero outstanding debt, including a mortgage. However, if you have any financial or familial responsibilities, life insurance can be vital.

How to get an online quote

Many variables go into a life insurance quote, and these details can be difficult to capture online in a form. The best way to get an accurate quote instantly is through an expert broker.

A broker can capture all your relevant details and then find the most suitable insurance policy and the best deal. It’s always worth having a quick discussion with an expert advisor first because they can help arrange the right policy based on your individual lifestyle and needs.

If you want to have a free, no obligation initial chat with one of our experienced life insurance advisors you can get started here:

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How money gets paid out with life insurance

If you pass away and have had a valid life insurance policy in place (with up-to-date premiums paid), one of your beneficiaries (the people receiving the payout) will need to file a claim.

The exact process will depend on the insurer, but it’s best to contact them as soon as possible to go through everything. When the claim is accepted, the money will be paid out from the policy.

Do you pay tax on a life insurance payout?

There’s no income tax or capital gains tax paid on the proceeds. However, a life insurance payout can cause some tax complications for inheritance tax (IHT) purposes, because it’s included as part of your estate. This means the payout could be subject to IHT at a rate of 40%.

However, there are ways to protect against this. For example, an insurance advisor can help put your life insurance policy in a trust (also known as ‘writing life insurance in trust’) when you set it up. Doing this removes the policy from your estate for IHT purposes, meaning your beneficiaries won’t pay any IHT on a payout.

Other things to consider

When it comes to life insurance policies, it’s always worth getting a better understanding of how everything works by speaking with an expert. However, here are some key terms and topics to consider when you’re looking for the best policy:

• Premiums: This is the monthly cost you need to pay your insurer to maintain your life insurance policy. The cost of your premiums will depend on things like your age, current health, type of policy, extras on the policy, and how much coverage you need.

• Beneficiaries: This is the term used for the person/persons who will receive any payouts from your life insurance policy. This could be your partner, children, other family members, or anyone you choose to list on the policy.

• Level of cover: Working out how much cover you need isn’t an exact science and it’s calculated on an individual basis. You’ll need to think not only about current liabilities (like a mortgage) but also the future financial circumstances of your beneficiaries. This is why life insurance tends to be for large sums.

• Exclusions: Most policies have exclusions. For example, some won’t cover you during the first year and most will exclude specific circumstances like suicide. Policies might also exclude high-risk jobs, extreme hobbies, or death as a result of smoking, alcohol or drugs.

• Extras: Depending on the insurer you use, there are usually extra benefits you can add onto your policy like critical illness cover, terminal illness cover, accidental death benefit, and additional niche features.

Examples of life insurance providers

The right life insurance provider for you will be specific to your circumstances and needs, but here are some examples of popular mainstream insurers:

• Legal & General: The policies include terminal illness cover as standard. You can also choose to have fixed premiums that won’t fluctuate unless you make changes to your policy, starting from just £5 a month.

• Aviva: With Aviva, existing customers can get a 10% discount on life insurance policies, starting at £5 a month. Aviva also makes it relatively straightforward to put your life insurance policy in a trust.

• Scottish Widows: You can choose between two main options with Scottish Widows - ‘Plan & Protect’ or ‘Scottish Widows Protect’. The Plan & Protect offers basic coverage up to £500,000 but the Scottish Widows Protect has more benefits and life cover up to £18 million.

It’s best to have a quick chat with an expert advisor to find the right life insurer for your needs. Some insurers specialise in specific areas like younger or older applicants or those who work in high-risk professions.

An advisor can show you all the available options and can sometimes even access or negotiate exclusive deals.

Why choose Teito for your life insurance needs?

Finding the right life insurance policy isn’t as simple as taking out other forms of insurance. You might end up keeping this policy for life and you want to be sure you can rely on it when your family needs it most.

Our expert advisors can assess your needs and help you find the most suitable life insurance policy tailored to your situation. They also have direct relationships with insurers, meaning they can get you deals not advertised elsewhere.

Here are some more of the reasons people choose us to find them the best life insurance policy:

• We can get you tailored quotes in minutes

• Our advisors have 5-star ratings on leading review sites

• Your first chat is free with no obligation to proceed

• Access to exclusive life insurance deals

Ready to take advantage of a free, no-obligation chat with an advisor who specialises in life insurance policies? Get started here.