What is life insurance and how does it work?

11 minutes

Life insurance explained

Life insurance provides financial protection for loved ones should the worst happen, and you unexpectedly pass away. A policy could offer your family, children, or chosen beneficiaries reassuring financial security after you’ve gone. The lump sum amount paid out relates to the amount and type of cover you choose.

No one wants to think about the worst happening, especially if you are buying a new home or starting a family. But, if your family are financially dependent on you, it might be the best option to protect them and give you some peace of mind.

So, who needs life insurance and when should you take out a policy? This guide will look at the common questions surrounding life insurance, including when you should consider a policy, what types of life insurance are available, and more.

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.

Here, we explore the various aspects of life insurance, so you’re prepared for whatever the future holds.

How does life insurance work? 

Life insurance provides financial support for your chosen beneficiaries in the event of death. Some providers also pay out earlier if you’re diagnosed with a terminal illness where life expectancy is 12 months or less.

There are a few different types of life insurance, and the one you choose is dependent on your personal circumstances such as your age and family situation. The amount of cover you have and how long you have it for is up to you, subject to the insurance providers limits. Life insurance can be taken out under joint or single names and your premiums are usually paid monthly.

Life insurance pays a lump sum when someone dies, and the amount of money paid depends on the level of cover taken out by the policyholder.

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 or if your policy includes it - experience a terminal illness diagnosis.

Life insurance covers:

  • If you pass away at some point within the term of your policy.
  • Terminal illnesses with less than 12 months to live if included by your insurer as part of your cover.


Depending on your provider, you could add Critical Illness cover to your life insurance for yourself or your children.

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 can include:

  • If you take your life within the first year of the policy.
  • Where life expectancy is more than 12 months, terminal illness cover will not be paid.

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.

Are there any rules on what a life insurance payout can be used for?

There aren’t any rules around how your life insurance payout is used. In fact, you should be thinking about its purpose to help you decide how much cover you might need. For example, if you want your life insurance to cover household bills and a mortgage, you’ll need to work out the right amount you want to be covered for. A life insurance payout can be put towards:

  • Your funeral expenses
  • Family or childcare costs
  • Repaying or offsetting your mortgage
  • Paying off outstanding credit cards or loans
  • Supporting your family with other expenses

When should you take out life insurance?

This is entirely up to you, but there are usually age requirements. For instance, you can take out life insurance with LV= at any time between the ages of 17 and 84.

Life insurance is usually considered during big life events, such as during a house purchase or starting a family.


Is life insurance only for families with children?

Having a child is one of the reasons people take out life insurance, but it isn’t the only reason. Consider this, if you were to die, would your partner struggle to make the mortgage payments? If the answer is ‘yes’, you should consider life insurance.

In the event of a partner passing away, life insurance could help pay off a mortgage or fund everyday expenses from childcare costs to household bills. If you need financial protection for your partner, family, or close beneficiaries in the event of your death, there’s a selection of affordable life insurance policies that can help you.


Do you need life insurance for a mortgage?

When you take out a mortgage you may be asked to consider life insurance. This is because you are committing to borrowing a significant amount of money for your property.

There is no obligation to take out life insurance for a mortgage. However, some lenders may insist you have life insurance before agreeing a mortgage. Either way, life insurance will help your partner to repay it in the event of your death, allowing them to remain in the family home.


How much does life insurance cost?

LV= life insurance starts from as little as £5 a month but this can vary. The price you pay will be dependent on several factors:

  • Your age
  • Your health
  • Whether you’re a Smoker or a non-smoker
  • Family medical history
  • Certain lifestyle or hobby choices
  • The length of the policy
  • The amount of cover required.

What affects your life insurance premiums?

How much you pay each month for your Life insurance is calculated by taking your age, health, lifestyle, and other key details into account. This information is then applied to the sum of money you want your life insurance to provide your chosen beneficiaries if you die and how long you want the cover to last.

The younger you take out life insurance, the cheaper your premiums are likely to be, but this will vary based on the specified term too. Similarly, how much you drink, or whether you smoke will also affect your premiums, as will other lifestyle choices such as whether you take part in dangerous sports or activities or have pre-existing health conditions.


What types of life insurance are there?

There are a few different types of life insurance to choose from. The one you pick will be dependent on your personal circumstances and what your provider offers.

There are typically two main types of life insurance:

1. Whole life insurance

There is no end date for the policy, it will continue for the duration of your life (as long as you make payments) and will pay out whenever you die. LV= does not offer these policies. Premiums tend to be higher than for term life insurance as the insurance company will eventually have to pay out on the policy as it has no specific end date.

2. Term life insurance

Term life insurance lasts for a specific amount of time. When this ends you will no longer be covered.

LV= life insurance policies are all for a specific term, and can be set up as either:

  • Level cover life insurance.
  • Decreasing cover life insurance.
  • Increasing cover life insurance (only available through a financial adviser).
  • Single life cover.
  • Joint life cover.

Level cover life insurance

In the event of your death, level cover will pay out a set amount. This amount will stay the same whether the claim is made in the first year, or during the last year of the policy term. This can be used to help pay off your mortgage or be left to your family.

The cover amount (which you can choose) and premiums are fixed for the term. You’ll also choose the policy length which can be from five to 50 years, depending on your age. It gives you the certainty of knowing what your payments are and what the amount at claim will be should you pass away. However, because the cover amount is fixed it won’t keep pace with rising costs due to inflation. This means you’ll be able to buy less in the future with the money paid out, compared to what you’d be able to buy with it today.

Decreasing cover life insurance

Decreasing cover life insurance is designed with capital and interest repayment mortgages in mind. With a capital and interest repayment mortgage, each year the money you owe on your mortgage will reduce, as you make your repayments. Your decreasing cover will also reduce. You choose the initial amount of cover, and it can be in place from five to 50 years. Your premiums will stay the same throughout the length of the policy and are usually cheaper than the equivalent level term life insurance policy.  

If you plan to change how much you pay on your mortgage or have an interest-only one, this may not be the best option.

Increasing cover life insurance

Increasing cover life insurance will increase over time, helping to protect any pay-out against the effects of inflation. However, the cost of your policy will also increase during the term as well. LV= don’t offer this type of policy directly through If you want to find out more, you will need to speak to a financial adviser.

Then, you can choose between:

Single life cover

You choose whether to take life insurance out on your own, or if you and your partner both want cover you can both take out separate policies. Each policy would pay out separately should the policyholder pass away. If you’re a couple and take out separate single life cover policies, you can choose different amounts on each one.

Joint life cover

This covers two people such as you and a partner on one policy for a single monthly premium. Joint life cover can be cheaper than two separate single life cover policies however once one claim has been made and paid out, the policy will come to an end and the other person will no longer be covered.


How do you buy life insurance?

Buying life insurance may seem complicated because of the different types of policies available. However, companies who offer life insurance will guide you carefully through the application process and ensure you are given all the information you need to make an informed decision.

You can purchase a life insurance policy online or through an adviser with some providers. Some, but not all policies require a medical exam, and most need you to answer health and lifestyle questions when you apply.


Does LV= provide life insurance?

Yes, you can buy life insurance with LV= from as little as £5 per month.

Our life insurance is available to UK residents aged 17 to 84 years, and your policy can run between five to 50 years but must end before your 90th birthday.

An LV= life insurance policy provides many benefits including:

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

Buying life insurance couldn’t be easier with LV=. It takes just a few minutes to get a quote. Protect your family and loved ones today with LV= life insurance.


Frequently asked questions

How much life insurance do I need?

This is entirely up to you and based on your individual circumstances, including how many dependents you have, their needs and lifestyle, and what income sources they’ll have should you pass away.

You may want to ensure you have enough to repay the mortgage as a minimum, and you may also want to consider adding in any other loans you have or larger bills and ongoing costs that will need repaying.

Is life insurance worth it?

For many people, life insurance is worth it for the peace of mind with knowing your family could be financially protected for the future. Whether you take out life insurance depends on your personal circumstances.

What happens to life insurance when the mortgage is paid?

If you have taken out life insurance to cover the mortgage, you can choose for it to end when the mortgage is due to have been paid off. If this is the case, you may want to take out decreasing cover life insurance. However just because your mortgage has been paid off, doesn’t mean your cover automatically ends. When you apply for life insurance you choose how long you want it to last within the minimum and maximum time periods available.

Providing cover to repay a mortgage should you suddenly pass away isn’t the only reason to take out life insurance. You may want it to continue until your children are older or if the money is to help with the cost of raising them. Likewise, if it is to protect your partner who will have ongoing household expenses, you may want it to continue. If that’s the case, you may want to think carefully about how long you’d need your cover to last for.

How much is life insurance a month?

The payments for life insurance can start from as little as £5 a month. However, the cost is worked out on an individual basis, and depends on lots of things such as the amount and type of cover you want, and how long you want your cover to last, so the exact price you pay will vary from person to person.

What is the length of time I can have life insurance for?

The length of time is up to you. With LV= it can vary from as little as five years up to a maximum of 50 years. You may choose to have it for the duration of your mortgage, or until your children are at an age where they can financially support themselves.

Once your children are older, have moved and have their own income, and you have paid off or are close to paying your mortgage, you may not need life insurance.

It’s important to note, however, that the policy must end before you are 90 and if you were to die outside of the term of your policy, no money would be paid out.

Looking for a life insurance policy?

If you think it’s time you took out a life insurance policy, get a quote from LV= today. If you aren’t sure what cover you need, you can speak to LifeSearch 0800 197 2266 for independent advice.