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 these 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 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 amount 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 life insurance. Your premiums and pay-out amount remain the same throughout the length of your policy.

Decreasing term - The policy 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 life insurance, 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 insurance. 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 insurance check out our article -5 Reasons Why You Should Buy Whole Life Insurance.

Who gets my life insurance payout?

When you apply for life insurance, you may be able 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:

  • Your death certificate

  • Filled in a claim form

  • A certificate of insurance from when the policy was purchased Claims are typically settled within a month or even just a few days. If you have any questions about making the claims process, get in touch with your policy provider.

It is also worth checking whether your life insurance 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, - you can find out more about what it means to have a policy written in trust here.

How much does life insurance cost?

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

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 life insurance. 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!

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