Life insurance guide: How it works, Types & Benefits

Life insurance is a crucial financial tool that provides a safety net for your loved ones in the event of your untimely demise. While the topic might seem sombre, understanding the intricacies of life insurance is essential for ensuring the financial wellbeing of your family and dependents. This comprehensive guide aims to demystify life insurance by covering everything from the basics to advanced considerations.

Please note: The online application gives you access to the Best Insurance Life Insurance product, which is provided by a single insurer. If you’d prefer to explore our panel of insurers or speak to someone for financial advice, please call us on 0330 330 9465.

FCA Regulated

No Hidden Fees

Rated 4.9/5

Get a Best Quote

What is life insurance?

Life insurance is also referred to as ‘life cover’ and serves as a financial safeguard for the family of the policyholder. This financial product is designed to provide monetary assistance to the lоved ones of the insured іn the unfortunate event of the policyholder’s demise during the policy term. This can include paying off outstanding debts or settling a mortgage, as well as covering funeral expenses or just addressing day-to-day financial needs.

Life insurance operates as a contractual agreement between the policyholder and the insurance provider. Premiums for life insurance are typically paid on a regular basis, whether that’s monthly, quarterly, or annually. In the unfortunate event of the policyholder’s demise while the policy is active and if all terms have been met, the beneficiaries named in the policy receive a lump sum payment known as the ‘death benefit’.

Income Protected

Your income is safe even when you can't work.

Types of Life Insurance Cover

Term Life Insurance

Level Term Life Insurance

Decreasing Term Life Insurance

Convertible Term Life Insurance

Renewable Term Life Insurance

Permanent Life Insurance

Mortgage Term Assurance

Renewable Term Assurance

Family Income Benefit Assurance

Tax Benefits of Income Protection Insurance

Tax-Free Benefits

In many cases, the benefits received from an income protection insurance policy are not taxed. This means that the regular payments you receive during a period of disability are typically considered tax-free income. This tax treatment is designed to ensure that the funds go towards replacing lost income rather than being subject to additional taxation.

Tax Treatment for Employer-Sponsored Plans

If you have income protection insurance through your employer as part of a group plan, the tax implications may differ. Employer contributions to group plans are often considered a tax-deductible business expense for the employer. However, the tax treatment of benefits received by employees can vary, and it is essential to understand the specific rules in your jurisdiction.

Tax on Investment Gains

Some income protection plans include investment components, such as cash value or investment-linked features. The tax treatment of any investment gains within the policy may depend on local tax laws. In some cases, gains may be tax-deferred until withdrawal.

Who needs life insurance?

Anyone whose loved ones or household relies on their income should really think about investing in life insurance. That includes parents with young or financially dependent children; spouses who share household expenses (like a mortgage, for example); and caregivers who support aging parents or other family members. Life insurance can ensure that housing costs, daily living expenses, and even future financial obligations can be covered, even if your household’s primary breadwinner passes away unexpectedly. If you have a debt you share with someone or specific financial liabilities (like loans or a business partner), a life insurance policy can be an invaluable safety net. Even single adults might take out a small policy to make sure that funeral and burial costs don’t burden their immediate family. Worried about your loved ones’ financial stability if you pass away? Consider life insurance today.

Talk to our advisor

Get a Quote

How much does life insurance cover cost?

Life insurance premiums are based on how likely you are to pass away during the policy’s term, which means they are affected by a range of factors, including:

Age

Older applicants will pay significantly higher premiums, because an older policyholder is statistically more likely to have to claim on their life insurance policy

Health

If you have pre-existing medical conditions (e.g. high blood pressure) or an extensive family medical history, you’ll likely have to pay more for life insurance coverage

Tobacco usage

Anyone who smokes, vapes, or otherwise consumes tobacco typically pays two to three times more than non-smokers due to the associated health risks

Occupation

HighIf you work a high-risk job (e.g. a job in aviation, construction, mining, etc.), you’ll pay higher premiums or you’ll require specialised policy riderser coverage means higher premiums.

Hobbies & lifestyle

You might enjoy partaking in hazardous activities like skydiving, scuba diving, racing, rock-climbing, or something else, but your pocket doesn’t

Death benefit

Selecting a higher payout will generally mean that you’ll have to pay higher premiums to keep your life insurance cover

Policy term

Longer term lengths (e.g. a 30-year policy over a 10-year policy) cost more in monthly fees because the insurer is taking on a larger risk

Life insurance type

Term life insurance, for example, is substantially cheaper than whole life insurance (even if the benefit amount is the same!) because term life covers only a limited period

How does life insurance work?

The fine details of exactly how a given life insurance policy works will depend on precisely what kind of cover you’re looking for, but in the broad strokes, all life insurance functions as a contract between the policyholder and their insurer. In exchange for monthly premium payments, your insurer guarantees a lump-sum payout (known as a ‘death benefit’) to your beneficiaries if you pass away during the policy term.

Term life insurance provides this coverage for a set period (for example ten or twenty years), while permanent life insurance will offer lifelong coverage, often including a tax-deferred cash value component that grows over time. When the policyholder dies, their beneficiaries just have to submit a claim to the insurer alongside proof of death, and once their claim is approved, they’ll receive the tax-free death benefit. This benefit can cover whatever they need; be it mortgage repayments, lost income, or funeral costs.

Key features of life insurance

Premiums

Payments made by the policyholder to maintain the insurance coverage. The insurer commits to paying the death benefit if the policyholder pays the premium, which is influenced by the risk of the policyholder passing during the policy term.

Death Benefit

Also known as the ‘face value’, these are essentially just the sum of money guaranteed by the insurance company to the beneficiaries specified in the policy upon the insured’s death. For instance, if a parent was insured, the beneficiaries might be their children.

Cash Value

The cash value component in Permanent Life Insurance acts as a savings account accessible to the policyholder during the insured’s lifetime, with cash accumulating on a tax deferred basis.

Useful Links

Short Term Income Protection Plan Long Term Income Protection Plan Life Insurance Time Limited Pet Insurance

Accident only pet insurance Mortgage Protection Insurance Mortgage Protection for Unemployment Understanding the Basics of Unemployment Insurance

Gadget Insurance Critical Illness Insurance: What Is It Buying Private Health Insurance Pet Insurance

Proven Through Performance

Our journey is defined by successful collaborations, innovative digital products, and measurable outcomes that help businesses grow, scale, and stay ahead in an ever-evolving digital landscape.

Learn More