How does life insurance work?

Understand how life insurance policies work and how to choose the right coverage.

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Life insurance is designed to protect your loved ones after you die or are no longer able to work. With the right coverage, your family will have enough to cover outstanding debts and maintain their current way of living.

What is life insurance?

Life insurance is a protective policy that helps your family recover financially after you die. You pay monthly premiums to the life insurance company with premiums calculated based on your risk of dying. In exchange, if you die during an active policy period, your family receives a payout called a death benefit to cover major expenses or replace income.

How does life insurance work?

The life insurance process is pretty straightforward. Once you’ve researched and compared life insurance providers and selected the coverage you want, follow the steps below:

  1. Sign up for a policy. You fill out an application that typically includes a medical history questionnaire and other background information. You may also be required to take some kind of medical exam because your health condition factors into the premium you’ll pay.
  2. Sign the contract. If your application is accepted, check over the terms and conditions of your coverage carefully. Then, sign the contract to start your coverage.
  3. Pay your premiums. You pay your policy’s premiums on time monthly, quarterly, semiannually or annually as specified in your contract. Always pay your premiums in full and on time to avoid having your policy cancelled.
  4. File a claim for payout. If you die while the policy is in force, your beneficiaries should file the appropriate documentation to make a claim. If you died within the first two years of buying the policy, called the contestability period, your insurer has the right to investigate the claim for possible fraud. Your beneficiaries should receive the payout as a lump sum or in payments as agreed in your contract.
  5. Receive your death benefits. Your beneficiaries receive the tax-free death benefit.

What types of life insurance can I get?

When it comes to protecting your family with a policy, you have two main types of life insurance to choose from, term life and permanent life. The only difference is how long you want to be covered for.

What is term life insurance?

    Term life insurance is a popular choice for most people. With term life insurance, you choose the term or period when you would need to cover your family’s expenses. For example, if you’re the sole breadwinner of your family and have a 30-year mortgage, a 30-year term life insurance policy would ensure your family could pay to stay in the home until it’s paid off.

    What is whole-of-life insurance?

    Whole-of-life life insurance offers lifelong coverage. While you’ll pay much higher premiums, you’re covered for life instead of choosing a coverage term. Your premiums are also invested, which means your policy has a cash value you can dip into once you’ve accumulated enough.

    Find out more about whole-of-life insurance

    What is level term insurance?

    Level term life insurance is a policy that will result in a fixed lump sum payout at any point during the policy term after the death of the policyholder. Even if, for example, the policyholder dies at the start of the policy term, the payout will be the same as if the policyholder were to die just before the end of the policy term.

    Find out more about level term life insurance

    What is decreasing term insurance?

    Decreasing term life insurance is usually taken out to cover mortgage repayments, although it doesn’t have to be taken out just for these. The theory is that the overall lump sum of money paid out by the insurer decreases over time, in the way in which mortgage repayments also decrease over time.

    Find out more about decreasing term life insurance

    What is increasing term insurance?

    This type of policy (also known as an index-linked policy) combats the expected rise in living costs. This means your policy increases slightly every year in line with the retail price index (RPI) or a fixed amount.

    Compare life insurance companies

    Name Product Cover options Age range at application Cover amount Pays out % claims paid Offer Link
    Aegon
    Aegon
    Level term cover, decreasing term cover, increasing term cover, whole of life cover and family income benefit.
    18-84
    £1million
    If a policyholder dies or is diagnosed with a terminal illness, sum will be paid.
    96%
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    AIG
    Level term cover, decreasing term cover, increasing term cover, whole of life cover and family income benefit.
    18-84
    £1million
    If a policyholder dies or is diagnosed with a terminal illness, sum will be paid.
    96%
    £75 Amazon giftcard. Terms and conditions apply.
    Compare providers
    Aviva
    Finder Award
    Aviva
    Level term cover and decreasing term cover.
    18-89
    £5million
    If you die or get a terminal illness and aren’t expected to live longer than 12 months.
    98.9%
    £75 Amazon giftcard. Terms and conditions apply.
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    HSBC
    Level term cover and decreasing term cover.
    17-69
    £250,000
    If policyholder dies, the sum decided will be paid out.
    100%
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    LV=
    Level term cover and decreasing term cover.
    17-79
    £10million
    If a policyholder dies or is diagnosed with a terminal illness, sum will be paid
    99%
    Compare providers
    Royal London
    Level term cover and decreasing term cover.
    18-70
    £500,000
    If a policyholder dies or is diagnosed with a terminal illness, sum will be paid.
    99.7%
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    Scottish Widows
    Level term cover and decreasing term cover.
    18-64
    £2million
    If a policyholder dies or is diagnosed with a terminal illness, sum will be paid.
    99%
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    Vitality
    Level term cover, indexed term cover, decreasing term cover and family income term cover.
    16-74
    £20million
    If a policyholder dies or is diagnosed with a terminal illness, critial illness could lead to an earlier payment.
    99.8%
    £100 Amazon giftcard. Terms and conditions apply.
    Compare providers
    Zurich
    Level term cover.
    16 - 83
    £40million
    If a policyholder dies or is diagnosed with a terminal illness, sum will be paid.
    99%
    £100 Amazon giftcard. Terms and conditions apply.
    Compare providers
    Legal & General
    Level term cover.
    18-77
    £3million
    If a policyholder dies or is diagnosed with a terminal illness, sum will be paid.
    97%
    Up to £150 amazon.co.uk or M&S gift card with life cover.
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    Canada Life
    Canada Life
    Level term cover, increasing term cover and decreasing term cover.
    18-80
    £1million
    If you die or get a terminal illness and aren’t expected to live longer than 12 months.
    100%
    The Canada Life app, access to discounts and benefits.
    Compare providers
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    How much does life insurance cost?

    Costs vary greatly based on the level of risk a provider or insurer considers you to be. Ultimately, this risk is reflected in the premium you pay, which considers such factors as:

    • Your age
    • How much you smoke or drink
    • Your pre-existing and current health
    • Your occupation
    • Your gender
    • How much you’re insured for

    See the average cost of life insurance

    How much life insurance can I get?

    Coverage limits vary across insurers and providers, but averages range from £30,000 to up to £5 million.

    The majority of providers offer coverage in multiples of £50,000 up to £5 million depending on the company. When you’re young, the difference between adding an extra £50,000 or £100,000 in coverage to your policy can be low.

    How much life insurance should I buy?

    As a general rule of thumb, many experts say you should take out insurance coverage that’s equal to 10 times your annual income. You can use a life insurance calculator to help you figure what coverage amount you need.

    To start determining how much coverage you need:

    • Put together a list of your financial obligations — your mortgage, credit card and loan debts and everyday household expenses.
    • Consider how long your family would need to pay for those items. For example, if you have five years left on your mortgage, total up five more years of mortgage payments. Or if your spouse is ten years away from retirement, add up the cost to replace your income until then.
    • Add in the costs necessary to fulfil your funeral or burial plans, plus any extra considerations for things like lost income due to funeral arrangements.
    • Subtract any savings, investments and other assets available to your family.

    Can I take out life insurance for my wife or child?

    Yes. Most insurers allow you to take out a joint policy to cover your spouse, and many offer coverage options that allow you to extend your policy’s coverage to cover your entire family.

    A handful of providers offer standalone life insurance for your children that allows for conversion to a term life policy when they’re grown. Talk to your insurer about your options.

    How do I buy life insurance?

    You have three main ways to buy life insurance: directly from an insurer online, through an insurance agent or through an insurance broker. The basic steps to purchasing a life insurance policy include:

    1. Get a free quote. Submit sufficient details to return an accurate quote on the policy type and coverage you’re interested in.
    2. Speak with a representative. If you like the quote, you’ll speak with the provider, an agent or a broker to discuss your options. You’re not obligated to pay any fees or even sign up for a policy at this point.
    3. Compare your policy options. You’re typically provided a variety of policy, coverage and premium options that meet your specified needs and circumstances. By comparing prices, benefits, exclusions and riders, you can narrow down an affordable policy with adequate coverage.
    4. Submit your application. You’ll work with your chosen provider, agent or broker to submit your application and necessary paperwork to the insurer assigned to your policy.
    5. Wait for a decision on your application. After considering the full scope of your application, including your health records, the insurer will decide whether to provide you with coverage and an appropriate premium. You may be asked to submit further information, including medical records and tests.
    6. Sign your policy contracts. After your application is accepted, you’ll sign a contract of agreement with the insurer, who then puts your coverage in place.
    7. Begin paying your premiums. You’ll pay your premiums as specified in your contract. As long as you continue making payments on your policy, it remains active.

    How to pay life insurance premiums

    Most insurers will allow you to pay your premiums by a personal cheque, cashier’s cheque or bank transfer. None accept cash.

    Some carriers will let you pay your initial premium using a credit card.

    Can I cancel my life insurance policy?

    Yes. If you decide you no longer need the protection it offers, you can let your insurer know that you’d like to cancel your life insurance.

    Note that your insurer is not obligated to refund any of the premiums you paid. And if you change your mind after cancelling your policy, you’ll likely face higher premiums and other restrictions if you’re older than when you initially signed up or have since had health issues.

    If you’ve recently signed up for the policy you’d like to cancel, you might be within a “cooling off” period. Many providers allow you up to 30 days to change your mind without fees or penalty, even refunding any premiums you’ve paid in the meantime.

    How to cancel your life insurance policy

    Can my life insurance company cancel my policy?

    Yes, but generally only in two specific circumstances:

    • You stop paying your premiums. You’re typically extended a grace period that keeps your benefits active even if you’ve occasionally paid a premium late. After the grace period, your insurer reserves the right to cancel your policy.
    • Your application is found to be fraudulent. If your insurer finds that you purposefully lied on your application or provided fraudulent supporting documents, your insurer has just cause to cancel your policy. If the fraud isn’t discovered until after your death, your insurer can cancel any claim due to your beneficiaries.

    Choosing life insurance beneficiaries

    Part of the process of signing up for a life insurance policy is designating the people who will receive your policy’s benefits after you die. Most policyholders designate their spouse or children, but you can assign your benefits to anybody who depends on you financially, even friends or business partners.

    If you don’t assign at least one beneficiary or you outlive your beneficiaries and fail to update your policy, your funds are distributed to your estate as outlined in your will.

    What if I want to change my life insurance beneficiaries?

    Updating your policy is simple: Just call your insurance company and ask how you can remove or add a beneficiary. If you have an estate planner, you’ll want to let them know of the change as well.

    How do life insurance payouts work?

    Most life insurance policies pay out your benefits to designated beneficiaries after you die. They might have the option of receiving a one-time lump sum or instalments over time (also called annuities).

    To start the claim process, a beneficiary or representative of your estate contacts your insurer, which then guides them through the paperwork and documents required to settle your claim.

    How to file a life insurance claim

    It’s the beneficiary’s responsibility to file a claim when the policyholder dies. These are the steps:

    1. Prepare to file. To file a claim, your insurer will typically require a copy of the death certificate, related medical reports and any original policy documents available.
    2. Notify your insurer. Your beneficiary or representative contacts the insurance company by phone or online to start a claim. At this point, only policy information and the date and cause of death are required.
    3. Follow your insurer’s procedure. From here, the process depends on your insurer. Generally, your beneficiaries will receive hard-copy forms to complete against specific instructions. Your insurer may also assign an officer to your claim.
    4. Submit forms and supporting documentation. Your beneficiaries submit the completed claim form, your death certificate and other documents as requested. They’ll also indicate their payout preferences, either a lump sum or structured annuities.
    5. Wait for assessment. Your insurer assesses your policy’s claim and supporting documentation. The process can take anywhere from a week to a month or more.
    6. Learn claim decision. Your insurer announces whether your policy’s claim is accepted, declined or requires additional information. If it’s accepted, your insurer pays out the claim by cheque as requested by the beneficiaries. Ongoing payments can be sent by cheque or direct deposit to a bank account.
    7. Policy is closed out. After your insurer pays out the benefit to your beneficiaries, your policy is considered closed. The payouts might be subject to taxes depending on your circumstances.

    What if my claim is rejected?

    If your insurer declines the claim, your beneficiaries have the option to file an immediate objection, unless the rejection is due to fraudulent or falsified information in the policy or claim.

    What about critical illness or disability insurance?

    Successful critical illness or disability claims are typically paid out in a lump sum that you spend however you’d like. If your critical illness or disability benefit is a rider or otherwise bundled with your life insurance policy, your coverage amount is reduced by the benefit you’re paid.

    Bottom line

    The right life insurance policy can help keep you and your family financially secure even if there’s a sudden loss of income. To find the right policy for you, compare life insurers and get quotes from your top providers.

    Frequently asked questions about life insurance policies

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