Life is a journey full of many unexpected moments, and we all hope to have a long life, but sadly this isn’t the case for everyone. Life insurance is a great way of providing financial support to your loved ones, should the worst happen to you. 

Though you may have already heard of it, you still might be wondering: how does life insurance work?

What is life insurance?

Put simply, a life insurance policy is a contract between you and your insurance provider, covering you in the event of death. When you die, your policy pays out a lump sum amount to your loved ones, to help them during an understandably difficult time.

Regardless of the policy type, when you take out cover, you make monthly payments to your insurer (these payments are called ‘premiums’). The cost of your monthly premiums depends on several factors, like your age, health, type and length of cover. Failure to make these payments could result in your policy lapsing and you no longer being covered.

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Upon many things, life insurance payouts can help your family with finances, such as:

Types of life insurance cover

Life insurance is generally made up of two main policy types - term & whole life insurance. Although they sound similar, these cover types have several differences involving how long they can run and typically how much they cost.

Term life insurance

The standard form of life insurance, a term life policy covers you for a set period of time (i.e 20 years).  Term life insurance pays out a lump sum to your family, but only if you die within the policy term.

If you survive the term (which is a good thing!) your policy expires, and you won’t be able to claim any money on the premiums already paid. Though it only provides temporary cover (i.e. over the agreed policy term only), it is typically cheaper than whole life insurance.

Term life insurance has 3 different types of cover:

Level term - Standard form of term cover. Your premiums and pay-out amount remain the same throughout the length of your policy.

Decreasing term - The pay-out decreases over the policy term. This type of policy is popular with those who are looking to cover large debts, such as repayment type mortgages. The idea is that if you die, your family is left with enough to clear the debt.

Increasing term - The policy payout increases overtime to try and help protect its value from inflation. This means the money your family receives holds its value against the cost of living. The downside is that your premiums will also increase to account for your increased sum assured.

For more information on term life insurance please see our guide - Term life insurance: How does it work?

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Whole life insurance

Unlike term cover, this policy provides permanent cover - so long as you keep paying your premiums. A cash lump sum is paid to your family, no matter when you die during the policy.

Despite providing permanent cover, whole life insurance is one of the most expensive types of life policies. However, your premiums are fixed - meaning even as you get older or fall ill, you’ll still pay the same for premiums.

Whole life insurance has two types of cover:

Standard cover - As described above, your pay-out amount and premium costs are fixed throughout the policy.

Maximum cover - A unique type of cover where policy is linked to an investment fund. Each month, your insurer will invest the money from your premiums, hoping to make a return that will cover the eventual payout amount.

There is an element of risk, as if the investment performs well, bonuses may be added to your policy. However, if it fails, your insurer may increase your premium costs to cover the loss.

If you’re undecided on whole life cover, check out our article -5 Reasons Why You Should Buy Whole Life Insurance.

If you and your spouse share responsibility of your household's monthly income, you may want to consider a  joint life insurance policy. Joint policies cover two people within a single policy, typically paying out after the first death in the couple. The surviving member then has the funds to cover future finances and provide support for your children.

Who gets my life insurance payout?

When you apply for life cover, you may be able to choose who you want to receive the payout from your policy. This person(s) is known as your ‘beneficiary’ which can include spouses, children, siblings, business partners among others.

When you die, your insurer will pay out the amount covered in your policy to your chosen beneficiary or beneficiaries. There is no time limit on when your family can claim life insurance. This means they can get on with funeral arrangements and are free to make a claim whenever the time is right.

When they make a policy claim, they will typically need to provide a few details, such as:

Claims are typically settled within a month or even just a few days.

We would also suggest you let your loved ones know when you take out a policy and who your chosen provider is, so they are aware you have cover should the worst happen.

How much does life insurance cost?

Several factors can determine how much your policy will cost. When you apply for life cover, your insurer will ask you some general questions regarding:

If you have any questions about making the claims process, get in touch with your policy provider, as they should be able to help.

It is also worth checking whether your policy is written in trust. When a policy is written into trust it can often speed up the policy benefit being paid out to your loved ones, as it will not have to go through probate. There are different benefits and limitations to putting a policy into trust.Learn more about what it means to have a policy written in trust.

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What happens if I can't pay my premiums?

If you are unable to pay your premiums, there are usually a few options available.

For example, if you are struggling to pay your premiums because you’re currently off work ill, and your plan includes waiver of premium, your insurer will cover your premiums for you and you won’t lose the cover.

Alternatively, they may be able to grant you some sort of payment holiday or repayment plan.  

It’s important to speak to your insurer before making any decisions about your policy. They will be able to provide more information and advice on what options are available.

Age and health are the two key indicators for the cost of life insurance. Naturally, as you get older, you are more likely to develop illnesses or medical conditions. Therefore, you become a higher risk to the insurer, and so premiums will be higher. For the cheapest life insurance quotes, it’s best to apply for cover when you are young, when premiums are low. 

Smoking also has an impact on the cost of your premiums. If you smoke, you can expect to pay more for your cover than non-smokers, due to the health risks it can bring. Some providers may reduce your premiums after being smoke-free for 12 months - often subject to cotinine tests.

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Where can I get life insurance?

If you’re searching for life insurance, you’ve already found the right place! Cavendish Online is one of the UK’s leading advisory brokers for life insurance products. Our commitment is to provide customers with the cheapest route to buy life insurance.

We won’t just limit your search to one company,  as we have access to many of the UK’s leading insurance providers. You can choose to apply for a quote using our online service, or you can get advice and guidance from our friendly and professional team. 

For more information, please do not hesitate to get in touch to discuss how we can help. Ensure financial protection for your loved ones by getting a quote, today!

Speak to the experts...

Give our advisers a call today.

Our team of friendly and professional advisers are on hand to help with any questions you may have regarding Life Insurance.

The advisers can also make recommendations tailored to your current situation and will research the market on your behalf, ensuring you secure the cover you need and supporting you every step of the way. 

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