How does life insurance work?

How do life insurance work out your premiums? How much coverage do you need? Life insurance delivers a large number of benefits, but there are so many different options that it can feel quite overwhelming. In this article, we'll dive deep into how to buy, keep and use life cover, answering all these questions and more.

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What is life insurance?

Life insurance is a type of insurance policy that pays out a sum of money (called the death benefit) to someone you nominate, if you pass away while the policy is still active. To keep your cover running, you pay monthly premiums to your insurance company.

People purchase life insurance policies for a variety of reasons:

  • Covering large debts if they're no longer around
  • Paying for a funeral
  • Support their family's lifestyle

But most of all, people love the peace of mind that life insurance brings.

You can find out more about life insurance in our dedicated article - What is life insurance?

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How to buy life insurance

In this section, we'll look at the life insurance buying process. There are so many factors you need to consider when buying a life policy, but let's look at each of them one by one.

Types of life insurance

Firstly, think about what type of life insurance policy you need. Each one is slightly different in terms of how you pay and the outcomes delivered if you pass away while the policy is still in force.

You can find out more about types of life insurance, including the pros and cons of each, in our dedicated Types of life insurance article

Term life insurance

Term life insurance policies last for a specific number of years. This is called the term. If you pass away during the term, a term life insurance policy will pay a lump sum to the people you nominated.

There are three different types of term life insurance policy, which we'll look at now.

Level term

With a level term life insurance policy, you select the amount of life cover you need and the length of the term. Your insurance company will tell you how much to pay in monthly premiums. The amount you pay in premiums and the possible payout remain the same throughout the term of your policy.

People like level term insurance because it's straightforward. However, inflation means the real value of level term lump payments decreases over time.

Increasing term

Increasing term life insurance is like level term, except the amount you pay in premiums and the cover amount go up at regular intervals during the term of the policy.

The reason people buy increasing term life insurance policies is to safeguard their lump sum against inflation. Normally, the amount insurance companies raise their cover amounts tracks the headline inflation figure.

Decreasing term

Decreasing term life insurance is the opposite of increasing term. The amount of life cover goes down the further you go into the term.

People typically buy decreasing term policies to help cover a large debt like a mortgage. As time goes by and the outstanding amount on your mortgage goes down, you don't need as much life cover. Decreasing term also tends to be cheaper than level or increasing term life policies.

Whole life insurance

Often called permanent life insurance or life assurance, a whole life policy covers you (as the name suggests) for your entire life. Your payout is guaranteed, no matter when you pass away.

A whole life policy brings ultimate peace of mind because your dependents are sure to receive a lump sum when you pass away. However, premiums tend to be higher than average for this type of policy.

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Over 50's life insurance

Specialist over 50's life insurance is a type of whole life policy with a guaranteed payout. Often, the policyholder's loved ones will use the death benefit to cover funeral expenses.

The great thing about over 50's life insurance is that acceptance is guaranteed. Anyone can get it, even if they're in poor health. On the other hand, the amount of cover on offer tends to be lower compared to other types of life insurance.

Joint life insurance

All the policy types we've talked about so far are for individuals. However, you can also get a joint life insurance policy for you and your partner. It works the same way as conventional life insurance, with premiums and a lump sum payout. If one of you passes away, the policy will pay out to the surviving partner.

The difference is that a joint policy only pays out once and ends on the payout. So, if your partner passes away, you are no longer covered (and vice versa).

A joint policy is typically cheaper than buying two individual ones.

Group life insurance

Our final category is group life insurance cover. These are life policies paid by employers for their staff.

  • 9.5 million people in the UK have life insurance paid for by their employer - Source

If you pass away while employed by the company, your nominated beneficiary will receive a payout.

Companies that offer group life cover for their people often experience lower-than-average staff churn.

Am I eligible for life insurance?

Most insurers will allow you to purchase a policy if you're over 18. Some operate maximum age restrictions, usually between 70 and 85.

What differs between insurance companies is the price they charge in monthly premiums, the length of term on offer and the amount of cover.

How much cover do I need?

This is a tricky question, as you can't predict the future. You want to leave your dependents with enough money to live on if the worst happens and you pass away unexpectedly. On the other hand, you don't want to pay so much in premiums that you're short of money now.

Here are five factors to consider when deciding how much life insurance coverage to purchase:

  • Mortgage - How much is left outstanding on your mortgage?
  • What other debts and living expenses do you have?
  • If you have children, how long will they need to be supported?
  • When do you plan to retire?
  • Do you have any ideas for your funeral?

While everyone is different, many people opt for a cover amount of 10X their annual salary, or they go for the outstanding amount of their mortgage with a decreasing term.

What affects the cost of life insurance?

Your insurer will weigh up many factors when deciding your premium prices. These include:

  • Age - The older you are, the higher your cost in premiums
  • Medical history - Policies for people with pre-existing conditions can be more expensive
  • Lifestyle - If you smoke or drink heavily, these health risks will be reflected in your premiums
  • Occupation - If your work is dangerous, your insurer may enforce higher premiums
  • Type of insurance - The cost for each type of life insurance we illustrated earlier is calculated differently
  • Cover amount - The higher your cover amount, the higher the price

Terminal illness cover

Terminal illness cover comes as standard with most life insurance policies. If you are diagnosed with a terminal illness (with a life expectancy of 12 months or less), the policy will pay out.

It offers valuable financial help at a difficult time for you and your family.

Critical illness cover

Critical illness cover is an optional add-on to most life insurance policies. If you are diagnosed with a severe illness (as specified by your insurance company), the policy will pay out a portion of your cover amount.

This can be extremely valuable if you are not able to work while you recover from your illness, providing much-needed financial help.

  • 59% of critical illness cover claims paid out by Aviva in 2021 were for cancer - Source

Buying life insurance

Here are three tips that will help you get the best result when you buy a life insurance policy:

  • Get a range of life cover quotes - Every insurer prices their policies differently and the amount they charge in premiums can vary wildly
  • Medical history - You'll probably be asked to complete a medical questionnaire when you buy life insurance. Make sure you fill it in as fully and honestly as possible. Failure to disclose a condition could spell trouble if your loved ones make a claim
  • Trust - Setting up your life insurance policy in trust could make your policy more tax efficient. Talk to a financial adviser to find out more
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Enjoying your life insurance

Once you've selected your policy, signed on the dotted line and started paying your premiums, you can relax and enjoy the many benefits of life insurance. These include:

Get valuable peace of mind

The thing that life insurance policyholders enjoy most is the peace of mind their cover brings. If the worst should happen and they pass away, they can sleep easy knowing they've done everything they can while they were around to look after their loved ones when they're not.

If you (and your income) are no longer around, life insurance could be a much-needed safeguard against financial hardship.

Support your loved ones' everyday EXPenses

If you passed away suddenly, how would your loved ones live without your income? How would they pay the mortgage, childcare fees and everyday bills?

We all have our financial obligations, whether they're necessities or luxuries. Your life insurance payment could mean that your dependents are able to meet these commitments.

Meet medical costs

Critical illness cover is a great addition to your life insurance. If you're diagnosed with a serious illness, you can use the payment from your life insurance company to cover any medical costs that build up as you recover.

Pay for a fitting send-off

Have you thought about your funeral and how you'd like it to go? Maybe you have no strong views one way or the other, but many people want to do their send-off their way.

Either way, funerals can be expensive. You may think it's not really fair to ask your loved ones to pay for everything at what is already a demanding and stressful time. Why not take out a life insurance policy which will provide a payout to help with the costs?

Be more tax efficient

Get your life insurance policy written in trust, and it may be that your death benefit is exempt from inheritance tax. This is because a trust means your insurance payout is not considered part of your estate.

This aspect of life insurance can be quite complex, however. Make sure you talk to a financial adviser who will be able to guide you in the right direction.

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Claiming on your life insurance policy

It's not a nice thing to talk about, but if you pass away, your loved ones will have to make a life insurance claim. Here's how it works:


Life insurance covers most causes of death. The most common reason for an insurance company not paying out is that the policyholder failed to disclose a pre-existing condition that contributed to them passing away.

However, not all causes of death will be covered by your life insurance. Here are three common exclusions:

  • Pre-existing conditions - It can be tricky to purchase coverage if you have health issues that may lead to problems in the future, such as diabetes. Likewise, if you have experienced a serious health event like a heart attack or stroke, it may be difficult for an insurer to cover you for a recurrence of those conditions
  • Lifestyle - If you pass away because of a lifestyle choice, such as smoking or heavy drinking, your insurer may not pay out the death benefit. The same is true if you pass away participating in dangerous sports
  • Suicide - If you take your own life, or pass away due to addiction issues, your loved ones' claim on your life insurance will be refused. Some insurers have a clause that they won't pay out for suicide only for the first year of the policy

How to claim

If you pass away, here's what your loved ones need to do:

  • Find your life insurance policy - To make it faster, while you're still around, tell your beneficiary (or the person you choose to execute your Will) about your life insurance. You could even share the documents with them.
  • Gather the correct documents to send to the insurance company when they make the claim. These will include:
  • Your death certificate
  • The life insurance policy certificate and documents
  • Any relevant medical information on the cause of death
  • Contact your life insurance company to notify them about your passing and make a claim. They will ask for information such as your name, date and cause of death, and policy number
  • Complete the claim form - Your insurance provider will send a claim form to your beneficiary or executor. They must complete it and send it back to the insurer with any relevant documents asked for

Receiving your death benefit

After sending through the form and documents, the insurer will consider the claim and notify your beneficiary of their decision.

It's important to know that for the vast majority of claims, the insurance company pays out without a hitch.

Your beneficiary should receive the payout in 30 days or less. Often, it's paid out within 5 days.

Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.

Founder and Editor

As the founder and editor of myTribe Insurance, the role of Chris Steele is to ensure that the information we provide is of the highest quality and value to those who read it.

Frequently Asked Questions

What happens if I don't die during the term of my life insurance?

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If you take out term life insurance and you're still alive at the end of the term, firstly, count yourself lucky. However, this is where your insurance policy ends. There is no cash value to your policy and you will not receive any money back from your premium payments.

You're always welcome to take out another policy at the end of your current one. However, you may find that premium prices have gone up.

Why do I need life insurance?

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Life insurance is a great thing to have if you want to provide financial support to your loved ones when you're not around.

Consider what would happen if you were to pass away suddenly. How would your loved ones cope without your salary coming into the house? Would they be able to meet your mortgage payments or household bills?

When you have life insurance, you can sleep easy knowing the people closest to you have financial protection if the worst was to happen.