Why life insurance exists
Life insurance pays a lump sum (or, less commonly, an income) to your beneficiaries if you die during the policy term. Its purpose is narrow but important: replacing lost income or clearing debts — most commonly a mortgage — so the people who depend on you financially aren't left in a worse position. It's not an investment and, for most straightforward "term" policies, pays nothing back if you outlive the term.
The three main types
| Type | How the payout behaves | Typical use |
|---|---|---|
| Level term | Fixed payout amount for the whole term | Income replacement, interest-only mortgages, general family protection |
| Decreasing term | Payout reduces over time, roughly tracking a shrinking mortgage balance | Repayment mortgages |
| Whole-of-life | Guaranteed payout whenever you die, provided premiums are kept up | Inheritance Tax planning, funeral costs, leaving a fixed legacy |
Level term insurance
You choose a cover amount and a term (say, £300,000 over 25 years), and that amount stays the same throughout. If you die within the term, your beneficiaries get the full amount; if you outlive the term, the policy simply ends with no payout and no refund of premiums. This is generally the cheapest way to buy a fixed amount of protection for a fixed period, and suits needs like replacing income until children are financially independent.
Decreasing term insurance
The cover amount falls over time, designed to roughly mirror the outstanding balance on a repayment mortgage as you pay it down. Because the insurer's maximum liability shrinks over the term, premiums are usually lower than level term cover for the same starting amount — but the cover reduces even if your actual mortgage balance, income needs, or debts don't fall in exactly the same way, so it's worth checking the fit isn't too loose.
Whole-of-life insurance
Rather than a fixed term, whole-of-life cover pays out whenever you die, as long as you keep paying premiums — which is why it's often used to cover an Inheritance Tax bill (which is only triggered by death) or to guarantee money for a funeral or a fixed legacy. Premiums are typically higher than term insurance for the same cover amount, since the insurer is guaranteed to pay out eventually rather than only if death occurs within a set window.
How much cover do you actually need?
There's no single formula, but a reasonable starting approach is to add up what a payout would need to cover — outstanding mortgage and other debts, funeral costs, and enough to replace your income for as long as dependants need it (often until children finish education, or a partner reaches their own retirement) — then subtract savings, existing cover, and anything a workplace "death in service" benefit would already provide. Many employers include a death-in-service benefit (commonly around 2–4 times salary) as part of workplace pension membership, which is worth checking before buying additional personal cover, since it may already meet part of the need.
What affects your premium
Age, health, smoking status, occupation and the cover amount and term you choose all affect price. Buying earlier, while you're younger and healthier, generally locks in lower premiums for a given amount of cover — waiting doesn't just delay the cost, it can also mean a worse rate if your health changes in the meantime.
Key takeaways
- Decreasing term suits a standard repayment mortgage; level term suits a fixed protection need like income replacement.
- Whole-of-life cover guarantees a payout eventually, at a higher ongoing premium, and is commonly used for Inheritance Tax planning.
- Check any workplace death-in-service benefit before buying — it may already cover part of your need.
- Cover tends to get more expensive the longer you wait, since age and health both affect price.