Everything you need to know about life insurance — from how it works to how much cover you actually need.
Life insurance pays a lump sum or regular income to your chosen beneficiaries when you die. Its primary purpose is to ensure that the people who depend on you financially — your partner, children, or anyone else who relies on your income — are protected if the worst happens. In the UK, around 60% of adults have some form of life insurance, yet many are underinsured.
The most common reasons to take out life insurance include protecting a mortgage, replacing lost income for a surviving partner, covering funeral costs, and providing for children's education and upbringing. The right type and amount of cover depends entirely on your personal circumstances.
There are several types of life insurance available, each designed for different needs:
A common rule of thumb is to insure yourself for 10 to 15 times your annual income, but a more accurate approach considers your specific obligations. Add up your outstanding mortgage balance, any other debts, the annual income your family would need multiplied by the number of years until your youngest child becomes independent, and any specific costs like school fees or university funding.
For example, if you have a £250,000 mortgage, £20,000 of other debts, and your family needs £30,000 per year for the next 15 years, you might need around £720,000 of cover. This may seem like a large amount, but the premiums for term insurance are often surprisingly affordable — a healthy 35-year-old non-smoker could get this level of cover for around £25–£35 per month.
💡 Don't forget to factor in your employer's death-in-service benefit. Many companies provide a payout of two to four times your salary, which can reduce the amount of personal life insurance you need. However, you lose this cover if you change jobs, so it should not be your only protection.
The best time to arrange life insurance is when someone depends on you financially. Key trigger points include taking out a mortgage, getting married or moving in with a partner, having children, starting a business, and taking on significant debts.
From a cost perspective, the younger and healthier you are when you apply, the cheaper the premiums will be. A 25-year-old will pay significantly less than a 45-year-old for the same cover because the statistical risk of death during the policy term is much lower. Locking in a long-term policy while you are young and healthy can save thousands of pounds over your lifetime.
If your health has changed since you last arranged cover — whether through a new diagnosis, weight gain, or starting to smoke — your existing policy becomes even more valuable because replacing it at current rates would be more expensive.
Couples often wonder whether to take out a joint policy or two separate policies. A joint life first-death policy covers both partners but only pays out once, on the first death. It is cheaper than two individual policies but provides less overall protection because the surviving partner is left without cover at a time when they may be uninsurable or only insurable at much higher rates.
Two single life policies cost more in total but pay out on each death independently, providing more comprehensive protection. If both partners die simultaneously (in an accident, for example), two policies would pay out twice, whereas a joint policy pays out only once.
For most families, two single life policies provide better value and more flexible protection, despite the slightly higher combined premium.
⚠️ If you are divorcing, review your life insurance arrangements urgently. A joint policy will need to be split or replaced, and you may need to adjust beneficiary nominations. If you have children, the parent with primary custody should have adequate cover in place before the decree absolute.
Life insurance payouts are not subject to income tax or capital gains tax. However, if the payout forms part of the deceased's estate, it may be subject to inheritance tax if the estate exceeds the nil-rate band of £325,000 (plus the residence nil-rate band of £175,000 if applicable).
Writing your life insurance policy into trust is a simple way to keep the payout outside your estate for IHT purposes. It also speeds up payment to your beneficiaries because the trustees can distribute the funds without waiting for probate, which can take months. Most insurers offer free trust forms, and the process of placing a policy in trust is straightforward.
With multiple policy types, hundreds of insurers, and significant variations in how they assess risk, choosing the right life insurance can feel overwhelming. A specialist broker can analyse your specific needs, compare the whole market, and find the most cost-effective cover for your circumstances.
Nesto matches you with FCA-regulated life insurance brokers who can help you find the right cover at the best price. It takes less than two minutes and the advice is free.
Get matched with a whole-of-market FCA-regulated specialist in under 2 minutes — free, no obligation.
Find my adviser — it's free →