What if my family lost my income?
Life Insurance Explained: A UK Guide
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This guide provides general information only. It is not financial advice or a personal recommendation and does not take account of your individual circumstances.
Quick answer
Life insurance pays out money if you die while the policy is in force. Most policies are term insurance, covering a set number of years, usually to protect a mortgage or a family's income. The main choices are how long the cover lasts, whether the amount stays level or reduces, whether it is single or joint, and whether it is written in trust.
What life insurance does
Life insurance pays money to the people you choose if you die while the policy is in force. It is usually taken out so that a mortgage can be repaid, or so that a family can manage without the income they have lost.
You pay a monthly premium. If you die during the policy term and the claim is accepted, it pays out. If the term ends and you are still alive, the cover ends and nothing is paid.
The main types
Level term
The amount of cover stays the same throughout the term. It is often used to protect a family's income or an interest-only mortgage.
Decreasing term
The amount of cover reduces over time, roughly in line with a repayment mortgage. It is usually cheaper than level cover because the amount at risk falls each year.
Family income benefit
Instead of a single lump sum, this pays a regular monthly amount from the time of the claim until the end of the term. It is designed to replace income rather than clear a debt.
Whole of life
This covers you for the rest of your life rather than a set term, so it will pay out eventually as long as premiums are paid. It is usually much more expensive, and is often linked to estate planning.
Single or joint policies
A joint policy covers two people and normally pays out once, on the first death, and then ends. Two single policies cover each person separately, so both could pay out. Two single policies usually cost a little more, but they can be simpler if a relationship or circumstances change.
Writing a policy in trust
A policy can be written in trust. Instead of the payout going into your estate, it goes to trustees you choose, who pass it to your beneficiaries.
- The money can often be paid more quickly, without waiting for probate.
- The payout can usually be kept outside your estate for Inheritance Tax purposes.
- You decide who benefits, which matters in blended families or for unmarried couples.
Insurers usually provide trust forms, and a will and a trust work alongside each other.
What affects the cost
- your age, health and whether you smoke
- the amount of cover and the length of the term
- level or decreasing cover
- single or joint policies
- whether critical illness cover is added
- whether premiums are guaranteed or reviewable
How people think about the amount of cover
The right amount is personal, but people often start by listing:
- the mortgage balance and any other debts
- how many years of income a family would need, and roughly how much each year
- childcare and education costs
- funeral costs
- existing cover, such as death-in-service benefits from work, which usually ends when you leave that job
Limitations to be aware of
- Accurate answers matter. If health or lifestyle information is missing or wrong on the application, a claim can be reduced or declined.
- Some exclusions apply. For example, many policies don't pay if death is caused by suicide in the first year.
- Term cover ends. Outliving the term means no payout.
A hypothetical example
A couple have a £250,000 repayment mortgage over 25 years, two young children and one main income.
- A decreasing term policy over 25 years could be set up so the payout roughly tracks the mortgage balance.
- Level cover or family income benefit would be the kind of cover designed around replacing the main income while the children are young.
Each type answers a different question, which is why the purpose of the cover usually comes first.
Questions worth considering
- What would need paying if one of us died: the mortgage, the income, or both?
- How long would that need last, for example until the children leave education?
- What cover do we already have through work, and would it end if we changed jobs?
- Would writing the policy in trust suit our situation?
- Do we both have up-to-date wills?
Frequently asked questions
Level term keeps the payout the same throughout the policy. Decreasing term reduces the payout over time, usually to follow a repayment mortgage, and is normally cheaper.
A trust lets the payout go to the people you choose via trustees, often more quickly than through probate, and can usually keep it outside your estate for Inheritance Tax.
No. A joint policy usually pays out once, on the first death, and then ends. Two single policies can each pay out.
It can reduce the gap while you're employed, but it is tied to your job and usually ends when you leave. It is also based on salary rather than your family's needs.