How Does Life Insurance Work?

Life insurance can be a tricky topic. Read our guide to find out how it all works.

We understand that the world of life insurance can be a little overwhelming. With the jargon and many different types of policies, you might end up putting off purchasing life insurance. That's why Bequest is here, to tell you how life insurance works, the low down on the different types of policies and what some of the key terms mean. 🙌

Life insurance policies: A quick definition and overview

Here is our thorough guide on how life insurance works in the UK.

What is a life insurance policy?

A life insurance policy is a way of providing financial support for your loved ones after you pass away. It can help minimise the financial impact that your death could have on your loved ones.

How do life insurance policies work?

When you take out a life insurance policy, you choose the amount of cover and how long you'd like to be covered. Typically, you then pay your premiums over the chosen amount of time and when you pass away, your beneficiaries will receive a pay out. ⏱️

Life insurance cover: key terms

There are a lot of different terms used in regard to life insurance, they can all start to blur together. Here are some explanations of the key life insurance terms.

Life insurance premiums

Life insurance premiums are simply the payments you make to your insurance company to be covered by your policy. 💷

To find out more about premiums, read our guide to life insurance premiums.

Life cover claims

You make a life insurance claim if someone close to you has died, whilst anyone can start a claim, only the named beneficiaries on the policy can collect the pay out. The pay out is the sum of money that is paid out upon the death of the policyholder.

To find out more about claims, read our article that tells you how to claim life insurance.

Life insurance coverage

Life insurance coverage refers to how much cover you need, and this decision is normally based on your reasons for getting a life insurance policy. It can include paying a mortgage off, tuition payments or other household bills.

Life insurance term

A life insurance term is specific to term insurance. This is where you choose how long you are covered by your policy. If you pass away within your term, your beneficiaries are eligible to claim the payout.

Types of life insurance coverage and payouts

With different types of life insurance come different types of payouts. ☂️ Below are a few options.

Term life insurance and a lump sum

A lump sum pay out is the most common form of life insurance payout. With term life insurance, you pay premiums for your term until you either pass away or until the end of your policy. If you pass away during your term, your beneficiaries can claim a lump sum payout.

Family income protection as support for your loved ones

Family income protection pays out a little differently from term life insurance, the pay out method is designed to mimic your monthly income for your family when you are no longer there. 🤺

Critical illness cover to work on your bucket list

Critical illness cover pays out when you are diagnosed with one of the listed critical illnesses, these can vary depending on the insurance company. Critical illness cover pays out in a one-off, tax-free lump sum and the money can be used to cover health-related expenses or could supplement your lost income whilst you recover.

Types of life insurance policies

There are many different types of life insurance, finding the right policy for you is dependent on your personal circumstances.

Level term life insurance

Level term life insurance is a policy that guarantees your loved ones financial support in the form of a pay out if you pass away within your specific term. Your premiums and pay out stay the same for the duration of the policy.

Decreasing term life insurance

Decreasing term life insurance, also commonly known as mortgage life insurance, is a type of cover that reduces in cost as your term goes on. Your premiums and payout can decrease at the same rate as your mortgage, and it's designed to pay off your mortgage if you pass away before doing so.

Whole of life insurance

Whole of life insurance is a type of permanent life insurance, meaning you pay your premiums for your whole life and are covered the entire time. Whilst, premiums tend to be slightly more expensive with this policy, it does mean your beneficiaries are guaranteed a payout when you pass away.

Critical illness cover

Having a critical illness policy means you will receive a pay out if you are diagnosed with one of the specific critical illnesses named on your policy. The pay out is normally used to cover any health-related expenses or to cover being out of work financially.

Family income protection

Family income protection is a type of life insurance that is designed with your family in mind. Having a family income protection policy means that your family can receive a pay out that mimics your regular income if you pass away.

Over 50s life cover

Over 50s life insurance is a type of cover that lasts from the age of 50 until you pass away. It's a great way to provide your loved ones with peace of mind that they will be supported financially when you're no longer here as the payout is guaranteed as long as you keep your premium payments up. 👍

Joint or single life insurance

At Bequest, we always recommend for everyone to get a single life policy. Did you know that if two partners take out a joint policy and one passes away, after the payout, the other partner would be left without life insurance?

FAQs

How long do you have to pay life insurance before it pays out?

A life insurance policy only pays out when you pass away during your policy. With some insurance companies, like Bequest, if you are diagnosed with a terminal illness and are left with 12 months to live, you can receive your payout with confirmation from a doctor.

Does life insurance actually pay?

Contrary to popular belief, 98% of UK life insurance claims payout successfully. As long as you are honest when applying for your life insurance policy and the claims process goes smoothly, you should have nothing to worry about.

Do you get your money back if you outlive your life insurance policy?

If you outlive your term life insurance policy, your premiums payments simply stop and your policy is over. You do not receive any money back if you outlive your policy however, you could renew or take out a new policy entirely to stay covered.

How does life insurance in the UK work?

In the UK, there are many different types of life insurance. Generally, you pay your premiums on a monthly basis for the duration of your policy until you pass away, which is when your beneficiaries will receive a pay out.

What is the average life insurance payout UK?

In the UK, the average term life payout was £77,535 in 2019. However, the pay out your beneficiaries receive is dependent on your policy and how much cover you decide to take out at the start of your policy.

What happens at the end of a life insurance policy?

When your life insurance term ends, your policy simply ends and you are no longer covered. You may want to renew your policy or take out a new one entirely, but this could be costly.

How long do you need to have life insurance before it pays out?

Whilst it depends on your policy, most life insurance policies have a 12 to 24 month waiting period before they pay out.

How does work life insurance pay out?

If you have work insurance as part of your employee benefits package, your employer may pay for some or all of the premium costs. It pays out in a lump sum to the employee's beneficiaries however, it's worth checking that your work life insurance policy provides enough cover for you and your loved ones.

Instagram icon

Safeguard your loved one's future and get your cover today! 🤺 Apply for Bequest Life

teal shape

FF Bequest Limited, trading as Bequest, is authorised and regulated by the Financial Conduct Authority with firm reference number 923791. You can check our authorisation on the FCA Financial Services Register by visiting the following website: register.fca.org.uk . We are registered in England and Wales, Registered office address: Founders Factory, Northcliffe House, London, United Kingdom, W8 5EH. Company Number 12367897.

Regulated by the Information Commissioner's Office (ICO) [ZA662891]. "Bequest" is trademark protected by FF Bequest Limited (UK00003452648). FF Bequest Limited is registered in England and Wales, No 12367897.

0203 916 5433

FF Bequest Limited, trading as Bequest, is authorised and regulated by the Financial Conduct Authority with firm reference number 923791. You can check our authorisation on the FCA Financial Services Register by visiting the following website: register.fca.org.uk . We are registered in England and Wales, Registered office address: Founders Factory, Northcliffe House, London, United Kingdom, W8 5EH. Company Number 12367897.

Regulated by the Information Commissioner's Office (ICO) [ZA662891]. "Bequest" is trademark protected by FF Bequest Limited (UK00003452648). FF Bequest Limited is registered in England and Wales, No 12367897.

Privacy policy
Terms of Use
Complaints
Cookies