What is life insurance?
Life insurance is a simple promise. You pay a small amount each month, and in return the insurer agrees to pay out a lump sum of money if you die while the policy is running. That money goes to the people you leave behind, so they have something to fall back on when your income stops.
That is the whole idea. It exists to make sure that if the worst happens, the people who depend on you are not left struggling with a mortgage, bills or everyday living costs on top of their loss.
How it works, step by step
- You choose an amount of cover. This is the lump sum that would be paid out, sometimes called the "sum assured", for example £200,000.
- You pay a monthly premium. The cost depends on your age, health, whether you smoke, how much cover you want and for how long.
- The insurer pays out if you die while covered. Your family claims, and the insurer pays the agreed lump sum, usually free of income tax and capital gains tax.
Who tends to need it
Life insurance is most useful for people whose death would leave someone else financially worse off. That often means parents with children at home, couples with a joint mortgage, or anyone whose income supports another person. If nobody relies on your income, you may not need it at all.
The two main types
Most policies fall into one of two camps. Term insurance covers you for a set number of years and is the cheaper, simpler option. Whole of life cover lasts for your entire life and is designed to pay out whenever you die. Each has its place, and we explain both in their own guides.
The tax point most people miss
A life insurance payout is normally free of income tax. But if it is paid into your estate, it can be added to everything else you own and pushed above the inheritance tax threshold, where 40% tax can apply. Writing the policy "in trust" usually keeps the payout outside your estate, so your family keeps the full amount. It is a free step that many people simply are not told about.
If you are new to all this, the sensible next move is to speak to an independent, FCA-regulated adviser who can look at your circumstances and point you to suitable cover.
Information only. This is general information, not financial, tax or legal advice, and not a personal recommendation. Tax rules depend on your circumstances and can change. Please speak to a qualified, FCA-regulated adviser before acting.