What is Life Insurance and do I need it?

If you’re reading this then you probably already understand why life insurance is such an important and positive product and how it can protect the people you love most. You might even have 'sort out life insurance' on your to-do list already. But like many other people, you may not have managed to get around to actually purchasing a policy yet.

Perhaps that’s because other more exciting, seemingly more important priorities have come up. It might be because you aren’t sure how it all works, or because you think life insurance will be too expensive for you. Maybe it is a combination of all of the above. If so, you are in the right place.

In this guide we will explain exactly what life insurance is, how it works, help you work out if you really need it, and why there may be no better time than now to finally sort out cover for you and your family.

How does life insurance cover work?

Life insurance is a type of insurance product that pays out an amount of money if you die. 

It sounds a little morbid, but the product works just like every other type of insurance. These policies are there to help you when bad things happen. Your mobile phone insurance replaces your phone if you break it, your car insurance covers the cost of repairs if you have an accident, and your life insurance cover looks after your family financially should the worst happen, and you pass away. 

What is life insurance used for?

Your policy can be used to provide financial support to your loved ones in a whole host of ways including:

Paying off debts

One of the most significant benefits of life insurance is its ability to help your loved ones cover outstanding debts. Whether it's a mortgage, car loan, or credit card debt, the payout from the policy could help ease the burden on your loved ones. This could mean that they are not left with the stress of dealing with unpaid debts during an already challenging time.

Covering everyday expenses

Your policy could also act as a safety net that helps replace your income to help your loved ones maintain their standard of living. The death benefit could help with essential monthly expenses such as household bills, utilities, groceries, and childcare. This can provide peace of mind to your loved ones, knowing they can keep up their lifestyle even in your absence.

Funding Future Needs

Life insurance isn't just about immediate financial support; it can also be a means of planning for the future. Funds from a policy could help with future expenses such as:

• University tuition for your children
   

• Retirement income for your spouse
   

• Legacy for your loved ones
   

• Your funeral costs

No matter your circumstances, having cover can be a great way to look after your loved ones if you're no longer around to support them directly.

What are the different types of life insurance?

There are two main types of life cover: Term life insurance and whole life insurance.

Term life insurance covers you for a set term, usually a number of years. You decide how long you’d like to be covered for and if you die during that period of time, your insurer will pay out the cover amount to your loved ones. If you survive to the end of the term, which we hope you do, you won’t receive an insurance payout.

Whole life insurance, on the other hand, covers you for your whole life, so in that sense you’re guaranteed to get a payout from your life insurance policy, because sadly we will all die one day. It's also known to insurers as 'life assurance'.

Another option is joint life insurance, which is designed for couples or business partners, or anyone else with a shared financial commitment. This type of policy covers two people under a single policy, typically providing a payout after the first person passes away. It can be ideal for those who want to ensure financial protection for the surviving partner.

Other types of protection

There are other types of financial protection that could be useful for you and your loved ones should anything happen to you.

Critical illness cover is a great add-on to a life insurance policy. This cover provides financial support in the event that you are diagnosed with a severe illness, such as cancer, heart attack, or stroke. The lump sum payout can help cover medical expenses, replace lost income, or make necessary lifestyle adjustments during your recovery.

Another option is income protection insurance. This policy provides regular payments, typically a percentage of your income, if you become unable to work due to illness or injury. Unlike life cover, it is designed to support you while you are alive, so your financial obligations can be met even when you are unable to earn.

Do I need a life insurance plan?

Not everyone needs life insurance, but it may be a product worth thinking about if you have a partner or children. 

Essentially, this type of insurance is there to support your loved ones financially when you’re no longer around. Think about the regular bills that you pay as a family, perhaps the mortgage, maybe you have childcare fees or upcoming school fees.

The question to ask yourself is whether your partner could manage to cover these outgoings if they lost you and your income. For many of us, that answer is no, at least not comfortably.

Can I choose who the money goes to when I pass away?

When you take out a policy, some will let you choose who you want the policy to pay out to, often referred to as your "beneficiary." You can choose multiple beneficiaries, such as your spouse, children, or even charities, and you can designate different percentages of the payout to each.

It’s worth reviewing your policy often to keep your beneficiaries up to date, especially after major life events like marriage, divorce, or the birth of a child. Many people overlook this step, which can lead to complications or delays in claims.

By default, however, most policies will simply pay out into your estate if you were to pass away (and the claim accepted). Because of this, you may want to consider writing your policy in trust to help it remain free of inheritance tax.

How much life insurance cover do I need?

The amount of life insurance that you need really depends on your personal circumstances and what you’d like to provide to your loved ones and/or dependents.

You may want to think about family life insurance when you buy a house. This is an exciting time, and so, admittedly, probably not the time that you want to think about morbid things. But your house may be the most expensive thing you ever buy, and with that probably comes a large chunk of mortgage debt.

You may decide that should you pass away, you would like your mortgage life insurance to pay off your mortgage, so that your partner isn’t left with a large debt that he/she may struggle to repay alone. This could prevent your loved ones having to seriously change their lifestyle or, even worse, lose their home. 

Funerals are becoming increasingly expensive, so you may also wish for your policy to cover the cost of your funeral. That way the cost won’t sit with your loved ones during an already upsetting and stressful time.

There really are no rules around what your life insurance payout can be used for and therefore how much insurance you need, it’s more a case of thinking about your personal situation, your family’s finances, and what financial support would be needed if your income was lost.

How much is life insurance?

The cost of life insurance depends on a few things:

• Your age
   

• Whether you smoke
   

• Your general health and lifestyle
   

• How much cover you would like (the sum assured)
   

• How long you want to be covered for (the policy term)

Basically, the more likely you are to make a claim on your life insurance, the more expensive your premiums will be, just like any other type of insurance. The younger and healthier you are, the cheaper your premiums will be.

So, if you’re considering life insurance, it’s best not to delay, simply because none of us know what’s around the corner and sadly many of us look to buy cover when it’s too late.

While the exact cost depends on many things, research has shown that many people actually overestimate the cost of life insurance. You may actually find that life cover is less expensive than you think, and low cost life insurance policies can be purchased for under £10 per month.

If you're looking to cut the cost of your premiums check out our guide on How to Save Money on Life Insurance.

How can I buy life insurance?

Maybe today is the day to finally tick 'sort out life insurance' off your to-do list?

At Cavendish Online, we offer various options to help you find the best insurance. You can apply for a policy online yourself, in just a few minutes. Alternatively, you can choose to speak with one of our specialists over the phone, who can guide you through the process and help you choose the best cover for you and your loved ones.