How does life insurance work?

Taking out life insurance allows you to protect your family financially when you’re no longer around.

If you pass away, a cash pay out will be made to your loved ones.

Many people perceive life insurance to be confusing, but it doesn’t have to be.

Life insurance works in four simple steps:

  1. Application
  2. Pay premiums
  3. Claim
  4. Pay out

Using an FCA regulated broker allows you to obtain all the information you need to make an informed decision and secure the best deal.

Read on to find out how life insurance works here in the UK…

What should life insurance cover?

Before making your life insurance application, you’ll need to think about what it is you want to protect.

Life insurance is very personal to your unique circumstances and needs.

How much life insurance do you need?

Enter your financial commitments to understand the level of cover you require.

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£121,687 is the estimated average outstanding mortgage per household in the UK.

Our property is generally the largest financial commitment any of us will make.

Your life insurance should cover this significant debt should you no longer be around.

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According to Money Advice Service, full-time childcare in the UK now costs £242 a week.

The loss of a parent could result in the need for additional childcare whilst the surviving parent increases their hours to account for lost income.

Your life insurance cover should factor in this additional required outgoing.

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The average level of debt (minus a mortgage) in the UK is £15,385.

Factoring in any outstanding debts in your name when arranging life insurance ensures this burden is not passed to loved ones.

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You may wish to leave your loved ones an inheritance or lump sum gift upon your passing.

Factoring in the gift amount when arranging your cover will ensure the pay out amount will be sufficient to provide your loved ones with this selfless gesture.

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According to SunLife, the average cost of a UK funeral is now £4,417, whilst the total cost of dying is £9,493.

This is a 130% increase over the past 16 years and shows no signs of slowing down.

A significant cost which should be factored into the amount of life insurance you secure.

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If you are one of the 65% of the UK who are lucky enough to have savings, this could be used as protection if you were to pass away.

Any pay outs from existing life insurance policies and investments can also be used as financial protection for your loved ones if you were no longer around.

Factor this into your required cover amount.

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Your total cover estimate

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Let us find your best quote.

The following points are things to consider when working out what your life insurance should cover:

  • Your lifestyle
  • Your age (how long until you’re at retirement age)
  • How much you can afford
  • Whether you’re a parent or have dependants
  • Number of children that depend on you
  • Age of your children (how long until they are financially independent)
  • The size of your mortgage
  • Whether you have personal savings

In general, if you have dependants and a mortgage, your life insurance should aim to relieve them of any financial worries should the worst happen to you.

A pay out from a life insurance policy could help to:

Life insurance application

Once you’ve determined what you want to cover, you can apply for life insurance directly from any insurer or from a price comparison website.

Alternatively, you can use an FCA regulated broker who’ll complete the application on your behalf whilst also securing the best available deal.

During the application process you’ll be required to provide information regarding:

  • Your age
  • Health and wellbeing
  • Medical history
  • Smoking status
  • Level of cover
  • Length of cover

Once your application has been accepted, your cover will commence.

On very rare occasions, your application may be declined.

This is only when insurers believe you to be too high risk. This can be due to a number of reasons, such as:

By using an FCA registered broker service, like Reassured, you can find the most suitable cover for your needs.

Life insurance policies

Your life insurance policy is essentially the contract of cover between you and your insurance provider.

It provides your loved ones with a cash pay out if the worst were to happen to you.

In your policy, you’ll nominate beneficiaries who'll benefit from your pay out when you pass away.

You’ll pay a monthly premium for your protection and will be covered for both natural and accidental causes of death.

It's important to make sure you're familiar with the terms and conditions of your policy to ensure it protects you against everything you require.

Typically, insurance policies in the UK are term-based or whole of life.

This means that your policy will either expire after a certain period of time (and a pay out is made if you pass away during this time) or it will last until you pass away (guaranteeing a pay out).

Keep reading to understand how each policy works…

Level term life insurance

Level term life insurance provides cover for a specified period of time (usually up to 40 years) and if you pass away during this time, a pay out is made.

Your sum assured (cover amount) will remain the same throughout your policy.

This means that no matter when you pass away (during the term) your loved ones will always receive the same amount.

This makes level term cover ideal for paying off large expenses such as an interest-only mortgage, debts and rising funeral costs.


Decreasing term life insurance

With decreasing term life insurance, the amount paid out to your loved ones reduces over time.

As with level term cover, you’ll be covered for a specific period of time and a pay out will be made if you pass away during the term.

This type of cover is great for paying off a repayment mortgage as you can have your sum assured reduce in line with your remaining mortgage balance.


Whole of life insurance

Whole of life insurance provides lifetime cover, ensuring your loved ones receive a pay out when (not if) you pass away.

You’ll be covered for the rest of your life, meaning you’ll continue to pay premiums until you pass away to keep the cover in place.

If you take out a whole of life policy at a young age this can lead to you paying more into the policy than what it’ll pay out.

As a result, whole of life insurance tends to be well suited to those who’re later on in life but still in good health.

A pay out from whole of life insurance can be used to cover funeral costs or be left as an inheritance for your loved ones to enjoy.


Over 50s plan

An over 50s plan guarantees acceptance to UK residents aged 50-85, with no need to provide medical information.

Once you’ve taken out a policy, you’ll be covered for life.

As you don’t have to provide medical information, your premiums will be based on your age and how much cover you want to take out.

Due to the unknown risk you pose to the insurer, premiums tend to be higher and your sum assured will be capped (this is usually at around £25,000).

There’s also usually a waiting period added to the policy (the first 12 – 24 months).

No pay out will be made if you pass away due to natural causes during this time, but your premiums will be refunded.

Which type of cover is best for you will depend on why you're looking to secure cover.

You can read our full guide on term life insurance vs whole of life insurance.

Life insurance premiums

The amount you pay for your premium will largely be based on your age, health, the amount of cover you want to take out and how long you want to be covered.

This includes, your age, health, amount of cover and how long you want to be covered for.

This information allows insurers to assess the level of risk you pose – the higher the risk, the more you’ll pay.

Your cover will remain in place as long as you keep up to date with your monthly premiums.

Failing to pay your life insurance premiums can lead to your policy lapsing and no pay out being made upon your passing.

At Reassured we can secure cover from as little as 20p-a-day.

Life insurance pay out

A life insurance pay out refers to the sum of money received by a policyholder’s beneficiaries upon their passing.

After you’ve passed away your beneficiaries, or trustee, will contact your insurer to make a claim.

The insurer will then review the claim and a pay out will be issued if the claim is valid.

In 2018, 99.6% of UK claims were paid out.

In order for the claim to be valid:

  • Your payments must be up to date
  • Your policy must be in date
  • All the information provided at application must have been correct

The funds will be paid to your beneficiaries as a lump sum to a UK bank account.

A life insurance pay out is not instant, it can take around 30 days.

When does life insurance not pay out?

In some rare cases, a pay out can be denied due to the claim being invalid.

The contestability clause is a 24-month period where further information about the death can be requested by the insurer to ensure a claim is valid.

If the claim is found to be invalid, the pay out will be declined and no funds will be paid out.

A pay out can also be declined due to non-disclosure. This refers to not being truthful on your application.

For example, if you had a pre-existing medical condition that you didn’t declare at the point of application.

It can be tempting to not declare certain information in the hopes of securing more favourable premiums but this can lead to your cover becoming invalid and your selfless investment wasted.

If it’s found that you didn’t provide the correct information, the insurer won’t pay out.

On average, our insurers pay out over 99% of claims made.

What happens if I don’t die?

If you’ve taken out term life insurance and you outlive the term, no pay out will be made and your cover will expire.

You’ll then need to find new cover to protect you for the remainder of your life.

In the later stages of life you could take out whole of life insurance or an over 50s plan, to provide a guaranteed pay out for your loved ones.

Alternatively, if you’ve no dependants and have paid off your mortgage you might consider opting for a funeral plan instead.

What happens if I cancel my life insurance?

If you cancel your policy, you’ll no longer be covered and your family no longer protected.

There's nothing stopping you from cancelling your life insurance policy at any time, but it should always be a last resort.

You’ll not be refunded any of the premiums that you’ve paid in.

There should be no extra charges for cancelling but it’s a good idea to check the terms and conditions of your policy as they can differ between providers.

If you can no longer afford to pay your premium, you can reduce your level of cover or try and find a cheaper policy elsewhere.

If you cancel your policy and choose to take out a new policy later in life, the premiums you’ll pay may cost a lot more due to your age, making comparing quotes even more essential.

Writing your policy life insurance in trust

Writing your life insurance policy in trust is a legal arrangement that allows your beneficiaries to benefit as much as possible from your investment.

It’s a completely free option that involves placing someone you trust in charge of your life insurance policy.

After your passing, they’ll manage the pay out and be responsible for distributing as you intended.

Writing your policy in trust detaches it from your estate (your money, property and possessions), meaning it gets paid directly to your beneficiaries and is not subject to 40% inheritance tax.

It also allows for the proceeds to bypass probate, resulting in a faster pay out.

At Reassured our customer services team can help you write your policy in trust, free of charge.

Do I need life insurance?

Whether you need life insurance is a personal decision.

At Reassured we believe that most people would benefit from some form of cover.

This is to ensure your loved ones are protected in the event of a worst-case scenario.

A pay out from your life insurance policy can help to relieve any financial stress at an already stressful time.

Compare life insurance quotes, (save money)

Now you have a better understanding of life insurance you should be able to make a more informed decision when taking out a policy.

You can use our completely free FCA regulated broker service to compare quotes from the UK's largest insurers.

A friendly member of our team will be happy to help you through the process.

Get in touch to receive your free, no-obligation quotes.

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