How does life insurance work?

Taking out family life insurance allows you to protect your loved ones financially when you’re no longer around.

If you pass away, a cash pay out will be made to your loved ones.

Many people perceive life insurance to be confusing, but it doesn’t have to be.

Life insurance works in four simple steps:

Application
Pay premiums
Claim
Pay out

Using a broker allows you to obtain all the information you need to make an informed decision and secure the best deal.

What should life insurance cover?

Before making your life insurance application, you’ll need to think about what it is you want to protect.

Life insurance is very personal to your unique circumstances and occupation

The following points are things to consider when working out what your life insurance should cover:

Your lifestyle
Your age (how long until you’re at retirement age)
How much you can afford
Whether you’re a parent or have dependants
Number of children that depend on you
Age of your children (how long until they are financially independent)
The size of your mortgage
Whether you have personal savings

In general, if you have dependants and a mortgage, your life insurance should aim to relieve them of any financial worries should the worst happen to you.

A pay out from a life insurance policy could help to:

Pay off remaining mortgage balance so your loved ones can stay in the family home
Cover future family living costs
Pay for your funeral
Pay off any large debts in your name
Be left as an inheritance for your loved ones to enjoy

Life insurance application

Once you’ve determined what you want to cover, you can apply for life insurance directly from any insurer or from a price comparison website.

Alternatively, you can use an FCA-regulated broker who can source quotes and help complete the application form, helping you ave time and money.

During the application process you’ll be required to provide information regarding:

Your age
Health and wellbeing
Medical history
Smoking status
Level of cover
Length of cover

Once your application has been accepted, your cover will commence.

On very rare occasions, your application may be declined.

This is only when insurers believe you to be too high risk. This can be due to a number of reasons, such as:

A pre-existing medical condition
High-risk occupation
Life insurance policies
Your life insurance policy is essentially the contract of cover between you and your insurance provider.
It provides your loved ones with a cash life insurance pay out if the worst were to happen to you.
In your policy, you’ll nominate beneficiaries who'll benefit from your pay out when you pass away.
You’ll pay a monthly premium for your protection and will be covered for both natural and accidental causes of death.
It's important to make sure you're familiar with the terms and conditions of your policy to ensure it protects you against everything you require.
Typically, insurance policies in the UK are term-based or whole of life.
This means that your policy will either expire after a certain period of time (and a pay out is made if you pass away during this time) or it will last until you pass away (guaranteeing a pay out).
Keep reading to understand how each policy works…
Level term life insurance
Level term life insurance provides cover for a specified period of time (usually up to 40 years) and if you pass away during this time, a pay out is made.
Your sum assured (cover amount) will remain the same throughout your policy.
This means that no matter when you pass away (during the term) your loved ones will always receive the same amount.
This makes level term cover ideal for paying off large expenses such as an interest-only mortgage, debts and rising funeral costs.
Decreasing term life insurance
With decreasing term life insurance, the amount paid out to your loved ones reduces over time.
As with level term cover, you’ll be covered for a specific period of time and a pay out will be made if you pass away during the term.
This type of cover is great for paying off a repayment mortgage as you can have your sum assured reduce in line with your remaining mortgage balance.
Whole of life insurance
Whole of life insurance provides lifetime cover, ensuring your loved ones receive a pay out when (not if) you pass away.
You’ll be covered for the rest of your life, meaning you’ll continue to pay premiums until you pass away to keep the cover in place.
If you take out a whole of life policy at a young age this can lead to you paying more into the policy than what it’ll pay out.
As a result, whole of life insurance tends to be well suited to those who’re later on in life but still in good health.
A pay out from whole of life insurance can be used to cover funeral costs or be left as an inheritance for your loved ones to enjoy.
Over 50s plan
An over 50s plan guarantees acceptance to UK residents aged 50-85, with no medical information required.
Once you’ve taken out a policy, you’ll be covered for life.
As you don’t have to provide medical information, your premiums will be based on your age and how much cover you want to take out.
Due to the unknown risk you pose to the insurer, premiums tend to be higher and your sum assured will be capped (this is usually at around £25,000).
There’s also usually a waiting period added to the policy (the first 12 - 24 months).
No pay out will be made if you pass away due to natural causes during this time, but your premiums will be refunded.
Which type of cover is best for you will depend on why you're looking to secure cover.
You can read our full guide on term life insurance vs whole of life insurance.
Life insurance premiums
The amount you pay for your premium will largely be based on your age, health, the amount of cover you want to take out and how long you want to be covered.
This includes, your age, health, amount of cover and how long you want to be covered for.
This information allows insurers to assess the level of risk you pose – the higher the risk, the more you’ll pay.
Your cover will remain in place as long as you keep up to date with your monthly premiums.
Failing to pay your life insurance premiums can lead to your policy lapsing and no pay out being made upon your passing.
At Reassured we can secure cover from as little as 20p-a-day*.
Life insurance pay out
A life insurance pay out refers to the sum of money received by a policyholder’s beneficiaries upon their passing.
After you’ve passed away your beneficiaries, or trustee will contact your insurer to make a claim.
The insurer will then review the claim and a pay out will be issued if the claim is valid.
In 2019, 97% of UK life insurance claims[1] were successfully paid out.
In order for the claim to be valid:
Your payments must be up to date
Your policy must be in date
All the information provided at application must have been correct
The funds will be paid to your beneficiaries as a lump sum to a UK bank account.
A life insurance pay out is not instant, it can take around 30 days.
When does life insurance not pay out?
In some rare cases, a pay out can be denied due to the claim being invalid.
The contestability clause is a 24-month period where further information about the death can be requested by the insurer to ensure a claim is valid.
If the claim is found to be invalid, the pay out will be declined and no funds will be paid out.
A pay out can also be declined due to non-disclosure. This refers to not being truthful on your application.
For example, if you had a pre-existing medical condition that you didn’t declare at the point of application.
It can be tempting to not declare certain information in the hopes of securing more favourable premiums but this can lead to your cover becoming invalid and your selfless investment wasted.
If it’s found that you didn’t provide the correct information, the insurer won’t pay out.
On average, our insurers pay out over 98%+ of claims made.