Thinking about life insurance? Here’s what you need to know first

Are you wondering whether it might be a good idea to buy some life insurance? Well, this guide is going to help you decide whether that might be good idea or not.

But before you spend any money, it may make sense to get a better understanding of what life insurance does and how it can support you.

Keeping things simple, essentially, life insurance is a policy that provides financial support to , your dependents, family and maybe your friends when you die by paying out a significant cash lump sum to support them.

Such payments are always welcome during what is likely to be an emotionally stressful time. At the very least, it will take away much of the financial stress.

Life insurance or life cover policies can also be used as a sort of ‘catch-all’ term for a range of other insurance types which also cover you and your family financially in several different ways.

These related types of insurance will generally give you a payment or perhaps a regular income, if you are unwell, have an accident and are unable to work or are suffering from many common diseases such as cancer.

This Mouthy Money guide will discuss each of the main types of insurance, in turn, while continually bringing it back to what it means for you if you obtain this sort of cover.

To do that, we will provide a clear description of how these products work and the different ways you might buy them. We also look at some important things to think about at the end.

There are downsides – one big one being that you might not need to make a claim, so you may feel as if your premiums have gone to waste, though you will have had peace of mind in the meantime.

 The guide will also briefly consider the sort of circumstances and life stages people tend to be at when they buy these products.

To illustrate, one current debate is whether it makes sense to take out insurance to cover your rent when, more typically ‘life insurance’, has been used to cover a mortgage i.e. it should allow your relatives to pay off the mortgage in the event that one of the main earners (that is you) has died. Increasingly the life insurance sector is arguing that this also applies to renting and certainly to families renting the family home, as well.

Product by product

Life insurance

This is essentially the most basic product – if you die, it pays out to your loved ones and dependents.

It is generally paid as a lump sum or in other words in a big, generally tax-free cash payment.

Your age, state of health and lifestyle can make a difference to the size of premiums you will have to pay to get a certain level of cover (essentially what you pay monthly to secure the cover).

For a relatively simple product, there are some interesting details. A ‘term’ product is one which covers you for a specific period of time for example 10, 20 or 30 years.

In the past that has often been designed to align with how long you will pay a mortgage for, so it covers the ‘term’ of the mortgage.

There is another layer of detail on top of this, generally related to mortgages.

‘Decreasing term’ will see the payout reduce over the years, but then it is expected that you will have paid off more of your mortgage so it will require less money to pay off. Monthly premiums are generally lower as a result.

You can also buy life insurance on a ‘level-term’ basis, where the payout remains the same and so it would pay off the mortgage and deal with other expenses. Monthly premiums tend to be higher with this type of cover.

Finally, there is an ‘escalating term’ where the amount of payout increases and should keep pace with inflation (some policies are indexed to inflation) so what your family get as a payout is maintained in real terms (i.e. after price rises).

It is not sold as frequently. Premiums rise over time too.

As we noted earlier, there is a move among insurers to convince people to consider taking out life insurance and/or other products such as income protection not just when they buy a home but when they are renting and certainly if they have young families to protect.

Waiver of premium

Waiver of premium is an additional benefit that covers your life insurance premiums if you are unable to work. It takes a while to begin and can start after 3, 6 or 9 months and does require an extra amount added to your premium. It does mean you won’t lose your cover if you briefly can’t afford to pay because you are ill for example.

Whole of Life insurance

There is another life product known as whole of life. Essentially you are covered for as long as you live (and keep paying premiums). It is often used as part of tax planning such as inheritance tax and may become more popular when government plans to count pension investments for inheritance tax purposes come into force in 2027. (Using it for this purpose definitely requires financial advice.)

That may have appeal for older people, but premiums are more expensive the older you get and cheaper earlier in life. You do need to consider your individual circumstances and again obtaining advice might make sense if you think this product suits.

Family income benefit

Family income benefit (FIB) is rather like life insurance, but instead of simply paying a lump sum, it pays an income to your family, making up for the loss of your earnings in that way. It is generally calculated by working out how much your family might need each month, with a premium calculated from that starting point. It has been a long-held view in the insurance sector that more FIB should be sold.

Terminal illness insurance

Like a lot of these different types of insurance, it does mean thinking about some unpleasant things that can happen to you.

Terminal illness (TI) insurance is no different in that respect. It deals with a difficult topic, and comes packaged along with life insurance.

It means that you will receive a payout from your policy if you develop a health condition where, generally, you only have twelve months to live.

A life policy with terminal illness cover built in is more expensive but it means any money problems will be eased when you are still alive. (The important thing is to know what you are buying and paying for.)  It may count towards your estate unlike life insurance, which is tax free most of the time.

Some policies may pay out if you have 18 months to live but you need to check on the details of this and it is less common.

Critical illness insurance

This type of insurance is often sold through financial advisers and some mortgage brokers though you can also go direct to an insurer or comparison site. It will give you a payment if you suffer from a significant health challenge or illness specified in the policy. So, for example, most types of cancer if they reach a level of severity are covered, as are most heart attacks, strokes, multiple sclerosis (and many rarer named conditions) will lead to your receiving a payout under your critical illness policy. It can also be attached to a mortgage partly on the assumption you may well see significant disruption to your financial life, if you have one of these illnesses. Critical Illness cover may be recommended as part of a broader financial plan, generally provided when an adviser considers all sorts of matters about your financial life.

The best policies come with all sorts of support including for example telephone-based nursing advice, mental health support and more.

Income protection

Income protection has been viewed as less popular among all these different product types, despite its obvious benefits. It will pay you an income if you cannot work due to illness or accident. We would stress that most income protection does not generally cover redundancy, which you might need to seek as a separate policy covering redundancy or part of a shorter-term policy sometimes called Accident, Sickness and Unemployment insurance.

Income protection has become much more popular in recent years – sales rose 18% in 2024. That may show a shift in sentiment among the population, but the important thing is whether it suits you.

In detail, it will cover you for a wide range of illnesses and injuries, including musculoskeletal problems, mental health conditions, and serious illnesses. 

 It will also provide you with rehabilitative services to help get you back to work.

Generally, income protection is designed to start to pay out after a certain period of time – this generally ranges from 4, 8, 13, 26, or 52 weeks. You might want to think about what financial resources you have and then what that means for the policy you take out.

For example, there are set periods for which health care workers and teachers receive sickness benefits and some income protection policies are specifically designed for these occupations and to kick in after these periods.

You should be paid perhaps half or two-thirds of what you earn before tax, but the income generally will be tax free. You may lose some benefits while you are being paid from the policy.

Some policies last for a year or two, some all the way up to retirement – and they are significantly more expensive. It also helps to check what requirements may be in terms of your ability to work in other occupations.

Generally, the more generous a policy is in terms of when you can claim and paying earlier, the higher the premium.

It is also important to understand how an insurer calculates when and for how long you are entitled to a payment.

Some policies, like those with an “own occupation” definition, will pay out if you are unable to perform the duties of your current job due to illness or injury. Other policies may have broader definitions, such as “suited occupation” or “any occupation,” which may require you to be unable to perform other jobs that you are suited for or any job at all, respectively, before a claim is paid. It is important to check what is covered in the policy you buy, perhaps along with an adviser. 

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