What is life insurance and how does it work?

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The following information should not be taken as advice. If you have any concerns about which type of life insurance is right for you, please contact a financial or mortgage advisor.

Life insurance is designed to provide financial protection for the people who matter most to you if you pass away. While it can’t make up for the loss of a loved one, it can help ensure your family isn’t left worrying about money at an already difficult time. 

Many people take out life insurance to help cover everyday living costs, repay a mortgage, or protect their family’s future if their income were no longer there. It’s often considered when major life events happen, like buying a home, starting a family, or taking on shared financial commitments. 

In this guide, we explain what life insurance is, how it works, the different types available, and how to decide whether it’s right for you.

What is life insurance?

Life insurance is a financial product designed to provide financial support to your loved ones if you pass away. It pays out a lump sum or, in some cases, regular payments to the people you choose, helping them cope with everyday costs and longer-term financial commitments at a difficult time. 

The aim of life insurance isn’t to replace emotional loss, but to reduce financial pressure. For many families, it can help maintain stability by covering essential outgoings, protecting a home, or ensuring future plans don’t have to be abandoned because of money worries. 

People typically take out life insurance when others rely on them financially. This could include a partner, children, or anyone you share significant financial responsibilities with, like a joint mortgage.

How does life insurance work? 

When you take out a life insurance policy, you choose how much cover you want and how long it should last. This is known as the policy term. In return for this cover, you pay a regular premium, usually monthly. 

As long as premiums are kept up to date, the policy remains active. If you pass away during the policy term, the insurer pays out the agreed amount to your chosen beneficiaries or into a trust. This money is usually paid tax-free and can be used in whatever way your loved ones need. 

If the policy reaches the end of its term and you’re still alive, the cover simply ends and no payout is made. This is common with term-based life insurance policies. 

Step-by-step: how life insurance works

• You choose the level of cover and policy length

• You pay monthly premiums to maintain cover

• You name beneficiaries or place the policy in trust

• A payout is made if you pass away during the policy term

Life insurance is a protection policy only and has no cash in value. If you stop paying your premiums, your cover may stop and you won’t get any money back.

What types of life insurance are there?

There are several types of life insurance available in the UK, designed to meet different needs. The most common is term life insurance, though other options may be suitable depending on your circumstances.

Term life insurance

Term life insurance provides cover for a fixed period of time, like 20, 25 or 30 years. If you pass away during this term, the policy pays out. If you don’t, the policy ends with no payout.

This type of life insurance is often used to protect a mortgage, replace income while children are financially dependent, or cover other time-limited responsibilities. There are different variations, including level, decreasing and increasing term cover.

LV= life insurance policies are term-based, meaning your cover lasts for a set number of years that you choose. LV= term life insurance is available as:

• Level cover – Pays out a fixed lump sum if you die during the policy term.

• Decreasing cover – Designed to protect a repayment mortgage, with the payout reducing over time.

• Increasing cover – Helps protect against inflation by increasing the payout over time (available through a financial adviser).

You can choose between:

• Single life cover – Covers one person and pays out if they pass away during the policy term.

• Joint life cover – Covers two people and pays out on the first death, after which the policy ends.

Get more details about term life insurance in our dedicated guide to term life insurance.

Whole of life insurance

Whole of life insurance provides cover for your entire lifetime and pays out whenever you pass away, as long as premiums are maintained. It’s often used for long-term financial planning, inheritance planning, or to help cover funeral costs. 

Need more information? Learn more about all the different types of life insurance.

What does life insurance cover?

Life insurance helps to reduce the financial impact your death will have on those closest to you. It provides financial support for your family, loved ones, or chosen beneficiaries if you pass away, are involved in a fatal accident, or experience a terminal illness diagnosis.

Life insurance covers:

Depending on your provider, you could add Critical Illness cover to your life insurance for yourself or your children to protect against unforeseen health issues.

What doesn’t life insurance cover?

There are certain medical conditions and scenarios that are not covered by life insurance.

These vary by provider but the most common reasons a claim may not be paid include:

• Taking your own life within the first year of the policy.

• Having a life expectancy of more than 12 months (terminal illness cover will not be paid).

• Failing to disclose relevant medical or lifestyle information when applying for the policy.

• Missing premium payments, which can cause the policy to lapse.

• Dying outside the policy term, such as after the policy has ended.

• Being subject to specific policy exclusions set out in the policy documents.

• Providing fraudulent or false information during the application process.

Understanding what isn’t covered helps ensure there are no surprises and allows you to choose a policy that offers the right level of protection for your circumstances.

What does life insurance with critical illness cover?

Critical Illness pays out a lump sum if you are diagnosed with a serious illness, a life-limiting condition, or are permanently affected by a serious accident.

Your insurance provider will have a list of conditions they can offer protection against. This could also include special provisions based on the type of medical condition you have. For example, you might use a certain percentage of your critical illness cover to help you manage everyday living costs.

What affects the cost of life insurance?

Life insurance premiums are calculated based on how much risk an insurer believes you present over the length of your policy, taking into account your personal circumstances, health, and the level of cover you choose.

• Your age when you take out the policy – Younger applicants typically pay lower premiums as they are considered lower risk.

• Your health and medical history – Pre-existing conditions or ongoing health issues can increase the cost of cover.

• Lifestyle factors like smoking – Habits such as smoking or high alcohol consumption may lead to higher premiums.

• The amount of cover you choose – A higher payout amount will usually result in more expensive premiums.

• The length of the policy term – Longer policy terms often cost more overall due to the extended period of cover.

LV= life insurance starts from as little as £5 a month but this can vary.

Do you need life insurance?

Life insurance isn’t always a legal or financial requirement, but it can play an important role in protecting the people who rely on you financially. 

If you were to pass away during the term of a policy, life insurance can provide a lump sum payment to your chosen beneficiaries, helping them manage essential costs and maintain financial stability.

You may want to consider taking out life insurance if you:

• Have a partner, children, or dependants who rely on your income.

• Have a mortgage or outstanding debts that would need to be repaid.

• Want to help cover funeral costs or other end-of-life expenses.

• Contribute towards household bills or shared financial commitments.

• Would like to leave a financial safety net for your loved ones.

A policy could help your family cover day-to-day living expenses, monthly mortgage payments, childcare costs, or future financial commitments if you’re no longer there to provide financial support.

Get life insurance that covers you with LV=

LV= offers flexible life insurance options designed to protect your loved ones and provide reassurance. You can get a quote and apply online, choosing the level and length of cover that suits your needs. 

UK residents aged 17 to 84 can apply, with cover available from as little as £5 per month. Policies can run between five and 50 years, as long as cover ends before your 90th birthday.

With LV=, you’ll benefit from:

• Free access to LV= Doctor Services, legal advice, and other member benefits.

• A lump sum paid to chosen beneficiaries if you die within the plan term.

• Terminal illness cover included.

• Flexibility to choose the best cover for you.

If you think it’s time you took out a life insurance policy, get a quote from LV= today; it couldn’t be easier. If you aren’t sure what cover you need, you get in touch with LifeSearch for independent advice.