What Is Life Insurance and How Does It Work?

Life insurance is a financial product that helps provide support for your loved ones after you die. It works by offering a lump sum of money to those you name in your policy, known as beneficiaries.

This payout is designed to cover expenses such as household bills, rent or mortgage, debts, and funeral costs. Life insurance is a way to help protect the people you care about from financial difficulty if you're no longer there to support them.

You take out life insurance by choosing a policy and agreeing to pay regular premiums, either monthly or yearly. The insurer promises to pay out if you die during the period of cover.

Policies can be short-term or long-term, and each one comes with different terms and conditions. Some policies end after a set time, while others last for your entire life. It’s important to pick one that fits your life stage and family needs.

Having life insurance means knowing your family could be looked after financially, even if the worst were to happen. It’s a way to offer peace of mind, knowing there is a plan in place.

The Main Types of Life Insurance

There are several kinds of life insurance, each offering different features and levels of protection. The right one for you depends on your situation, how long you need cover, and what you want the policy to do.

Term Life Insurance

Term life insurance is one of the most common types. It offers cover for a fixed period—say 10, 20 or 30 years. If you die within that time, the policy pays out the agreed amount to your beneficiaries.

This type is useful for protecting your family during key life stages, such as when raising children or paying off a mortgage. There are three main types of term cover:

Level term: The pay-out stays the same throughout the policy.

Increasing term: The pay-out amount increases over time, usually to keep up with inflation.

Decreasing term: The pay-out amount reduces over time, which is often used to match a declining debt like a repayment mortgage.

Whole of Life Insurance

Whole of life insurance, sometimes called 'life assurance', covers you for your entire life. As long as you keep paying the premiums, the insurer will pay out when you die, no matter when that is.

This type of policy is often more expensive, but it guarantees a pay-out. It's often chosen by those who want to leave something behind for their family or use it as part of inheritance planning.

Some whole of life policies also include a savings or investment element, where part of your premium builds cash value over time. This may allow you to borrow against the policy or receive a portion of the value if you cancel it early.

Over 50s Life Cover

Over 50s life insurance is designed for people aged 50 to 80. It doesn’t usually ask any health questions, making it simple to apply for, even with existing medical conditions.

The pay-out amounts tend to be smaller, but they are often enough to cover things like funeral expenses or small debts. These policies are usually whole of life, meaning they last until you die, and the pay-out is guaranteed.

One thing to note is that you may end up paying more into the policy than your family will receive, especially if you live a long time. Even so, it offers reassurance that some costs will be taken care of.

How Life Insurance Policies Work in Practice

When you take out life insurance, you agree to pay regular premiums. These payments can be fixed or vary depending on your policy and provider. In return, your insurer agrees to pay out a set amount of money if you die while covered.

The payout goes to your chosen beneficiaries. You’ll name these when you apply, and you can often change them later if needed. The money can be used however your family chooses—there are usually no restrictions.

Most policies are based on your age, health, job, and lifestyle. Riskier lifestyles or serious health conditions may lead to higher premiums or even a refusal of cover.

If you choose a term policy and live beyond the end date, your cover ends and there’s no payout. Whole life policies guarantee a payout, but they usually cost more.

Many insurers now offer added extras, like critical illness cover, which pays out if you’re diagnosed with a serious illness. Some also include terminal illness cover, which may release the payout early if you're told you have less than a year to live.

Making a claim is usually simple. Your family contacts the insurer, provides documents like a death certificate, and if all is in order, the payment is made.

Who Should Consider Life Insurance?

Life insurance is not only for older people or those with children. In fact, many different groups can benefit from having a policy in place.

If you have a partner, children, or anyone else who depends on your income, life insurance can help protect them if you're not around. It can be used to cover living costs, debts or give them time to adjust financially.

People with a mortgage often get life insurance so the loan can be paid off if they die. This helps prevent loved ones from losing the home due to unpaid debt.

Single people may also take out life cover to help pay funeral costs or to leave a gift to someone special. It can also be used to cover any unpaid debts that might otherwise pass to relatives.

Business owners often use life insurance to protect the business. A policy can cover key people in the company or make it easier for a partner to buy out a share in the event of a death.

In short, anyone who wants to leave something behind or protect others from financial stress should consider taking out a policy.

Key Things to Know Before You Buy Life Insurance

Before you buy life insurance, it's important to understand how it works and what options are available. Here are some key points to consider to help you make the best choice.

Think About What You Need

Start by working out how much money your family would need to cover bills, debts, and future plans if you weren’t there. Include rent or mortgage payments, school costs, and general living expenses.

You should also think about how long you need the cover to last. Do you need it until your children grow up? Until your mortgage is paid? Or for your entire life?

Once you know what you want the policy to do, you can compare quotes and choose a plan that fits your budget and needs.

Be Honest and Accurate

When applying for life insurance, you’ll be asked questions about your health, lifestyle, and medical history. It’s important to answer these truthfully.

Giving false or incomplete information could lead to a denied claim later on. This could leave your family with no financial support when they need it most.

Some providers may offer cover without a medical, but it usually comes with lower payouts or higher premiums. Weigh the pros and cons of both options carefully.

Review Your Policy Over Time

Life changes, and your policy should change with you. It’s a good idea to review your cover every few years, especially after big life events like marriage, having children, or moving house.

Make sure the cover still matches your needs. You may want to increase the amount, add extra features, or even take out an additional policy.

Also, keep your beneficiary details up to date. This ensures that the payout goes to the right person without delays or confusion.