If you need life insurance, then you should compare policies and review several quotes to secure the right policy for your situation. We explain how to work out if you need life insurance, plus how to get the best policy at a good price - with commission refunded to cut the cost.

Life insurance is a valuable but under-bought cover. Almost all of us will have heard of it, however, many don't like to think about dying and avoid the issue. 

This could help explain why 46 per cent of those aged over 55 said they’d never requested a quote for life insurance, according to a MoneySupermarket survey. 

But financial advisers generally recommend that you must think about taking out a life insurance policy if you’ve got children, other dependants or a joint mortgage. It can clear your mortgage if you die and provide money to help your family survive without you.

Buying life insurance might not be top of your to-do list. But if the worst were to happen, it could end up being the most important financial product you ever bought because of the protection it offers.

How does life insurance work?

Life insurance comes in different shapes and sizes, but it generally works by providing a payout to dependants if you die. Some policies provide cover until you die, while others offer protection for a set length of time, such as the duration of a mortgage.

The cost each month depends on factors like:

• your health
• personal circumstances
• level of cover
• the type of policy you choose

Generally, those who own a mortgaged property with a partner, especially if they have children, should at least get life cover with the aim of clearing their home loan if they die.

This means the surviving partner and any children can remain in the house and won’t have to worry about paying the mortgage on a reduced household income.

Many people also decide they want their loved ones to be better catered for than simply having the mortgage paid off so take out policies that provide more protection.

There are different types of life cover:

Level term insurance

Level term insurance pays out an agreed lump sum if you die within a set time frame.

You can take it out in conjunction with your mortgage term or planned working life, for example. It pays out the set amount if you die during that period.

Decreasing term insurance

This also pays out a lump sum, but the amount declines over the length of the agreement.

You could take this out with a repayment mortgage, reflecting the fact that the outstanding debt will fall over time.

It’s cheaper than level term insurance.

Whole of life insurance

This type of policy lasts for the rest of your life and is also known as life assurance. The insurance pays out a set sum whenever you die.

Policies can be made up of both an insurance element and an investment element, where part of your premium is invested in the hope of it growing over the long term.

The pay out from this type of life insurance can be used to help fund an inheritance tax bill.

Whole of life insurance is the most expensive form of life insurance.

How to buy life insurance

There are different ways to buy life insurance. You can purchase it online through a price comparison website, directly from a provider, or through a qualified financial adviser.

There are several things to think about when buying life cover including:

• finding the best price – although cheapest won't always be the right choice
• what the right level of cover is for you
• what arrangements you may already have through work

Life insurance policies can be joint or individual. It’s worth comparing costs for both, because separate policies can work out better and cheaper for a couple – or only slightly more expensive. And if something terrible happens and you both die, they will both pay out.

In contrast, a joint policy will typically only deliver one payout on the first person's death. 

If you are happy to go through the process online without advice, This is Money recommends checking life insurance prices with broker Cavendish Online*, which in return for a small £25 one-off fee does not take commission on policies, cutting the cost of monthly payments. 

Guaranteed vs reviewable life insurance premiums

If you take out a policy with guaranteed premiums, the price of your policy will stay the same over the term.

Otherwise, you’re looking at a policy with reviewable premiums, which means the insurer can change the price – both up and down. Policies with reviewable premiums can be cheaper. But be wary of 'low-start' policies that start with low premiums that rise over time, because these can end up being more expensive over the duration of the policy.

Reviewable premiums will only be set for a certain term and will most likely increase on a date in the future when they’re reviewed.

Should you write life insurance in trust when purchasing a policy?

If you write a life insurance policy in trust, it means you’re transferring the legal ownership of it to your chosen trustees.

The advantages of this are:

• the proceeds from the policy fall outside your estate
• the pay out won’t therefore be subject to inheritance tax
• the people you’ve specified the money should go to won’t need to wait for probate

An unmarried, cohabiting couple with single policies rather than a joint one should also consider writing a policy in trust. This ensures the payout goes to the surviving partner, who wouldn’t have a legal claim on it otherwise.

The main disadvantage to putting life insurance in trust is that it’s difficult to make changes once it’s done, because you’ve transferred ownership to your trustees.

It’s important to consider getting professional advice before going ahead.

Most insurance providers will let you put the policy in trust at the point of purchase, and it’s often free to set up. It usually involves just filling in a form and providers or advisers can help you do this. 

How much life insurance do you need?

You’ll probably want your life insurance payout to cover any remaining mortgage, pay for a funeral and leave some money to help with living expenses – but the more cover you take out, the pricier it will be.

If you want the mortgage to get paid off

If you’re on a capital repayment mortgage and simply want to cover that, decreasing term life insurance may be best. The payouts on these types of policies can reduce over time as the balance of your outstanding mortgage falls, resulting in lower premiums.

It should ensure your mortgage is repaid when you die and is likely to be the most cost-effective option.

If you think you’ll end up moving to a more expensive property, it may be worth increasing your coverage earlier on, because it tends to be cheaper the younger you are.

If you’re on an interest-only mortgage

Your debt isn’t steadily being repaid on a mortgage like this. Here you might want to consider a level term life insurance policy, so it pays out a fixed lump sum that can clear the outstanding capital balance when you die. This is typically more expensive than decreasing term life insurance.

If you want more protection for your family

Even though it's more expensive, some people may choose to take out level term life insurance until a certain age anyway. For example, until their children are old enough to leave school or university – or even to protect their family if they die younger than average.

If you want to protect against rising living costs

With increasing term life insurance the payout increases by a fixed amount each year, or in line with inflation. This type of insurance is designed to factor in rising living costs, but premiums will also rise as a result.

If you want optional add-ons such as waiver of premium

You can add extra add-ons and benefits to a life insurance policy. They rack up the price of your policy, so think carefully about whether you need them.

A waiver of premium is one such add-on, which covers the cost of your monthly premium if you become seriously ill or injured and can’t work.

Another add-on is critical illness insurance, which covers you for illnesses that you are expected to survive by paying out a one-off lump sum.

Check whether you already have some form of insurance

When taking out life cover, consider what arrangements you already have in place.

For example, employers can offer some form of death in service benefit, which may be a multiple of your salary. Bear in mind that this will only cover you while you are employed by that company, if you leave and then die without fresh death in service benefits in place, your family could be left exposed.

Pension pots built up can also be passed on to your family if you die. From April 2027, unspent pension pots will be subject to inheritance tax.

Check with your employer and pension provider what benefits you have before assessing the level of cover that you need. 

How much does life insurance cost?

Life insurance premiums are calculated depending on your history, health and age, among other factors. The cost also depends on the type of cover you take out.

There’s no one set price you can expect to pay, with the monthly cost potentially ranging from around £5 to £35 for non-smokers in good health, depending on age.

For smokers the cost creeps up considerably, because insurers see them as a higher risk.

Keep in mind that whole of life insurance can be significantly more expensive.

Other circumstances such as marital status and credit score may also be used to calculate your premium.

Ultimately, the amount of cover you need – and therefore its cost – depends on your personal circumstances. Things such as outstanding loans, the number of dependants and how much would be needed to replace your income should all be taken into account, as well as how much you can afford to pay each month in premiums.

The best way to find out how much a life insurance policy will cost you is to get a quote from a comparison website or broker, or to speak to an adviser. 

Should you get joint or separate life insurance?

One thing you and your partner will have to consider is whether you want to buy separate or joint life insurance. Here's a comparison of the two:

Separate life insurance

One of the most attractive things about having your own separate life insurance policy is that it remains unaffected if your relationship ends.

On top of this, if both you and your partner die, separate policies will result in two payments. Separate policies are more expensive, however.

Joint life insurance

Joint life insurance is the cheaper option. There will most likely only ever be one payout in the event of either you or your partner's death.

Depending on your policy terms, it will either pay out when one of you or both of you dies.

If you do take a joint policy, for young families, it's probably best to make sure the policy will pay out when the first person dies. Some policies pay on second death, but these are primarily meant for inheritance tax planning.

The downside to taking a joint life policy is that if one partner dies, the policy pays out and then the remaining partner or parent must take out a new policy.

Depending on their age and circumstances, this could cost significantly more than having taken out two single policies at the outset.

How to find life insurance by comparing quotes

For most simple life insurance needs, there isn't a great deal of difference between policies.

However, it's important to consider how insurers may underwrite people with specific medical conditions, so a good analysis of the market and the true price of the cover is vital for those without a completely clean bill of health.

You can buy life insurance over the phone, by comparing quotes online at a comparison website, or directly from a company.

You can also go to an independent financial adviser, who can work out how much your family is likely to need.

Life insurance usually pays commission to the broker or financial adviser involved – this adds to the cost of policies. There are ways to bring this down, however.

For example, some discount brokers such as Cavendish Online* charge a small one-off fee, but they waive commission from the insurer and pass savings onto you in the form of cheaper monthly premiums if you take their non-advised route. It also offers guided and fully advised life insurance service options.

Other brokers such as LifeSearch and Reassured offered advised services and don’t charge an upfront fee but get paid a commission by the broker. This can affect the cost of your policy.

You should check an adviser’s fee structure before going ahead with them.

What about other types of insurance?

There are other forms of insurance that can protect you and your family if catastrophe strikes.

For example, critical illness cover works in a similar way to life insurance but instead pays out if you’re diagnosed with a defined critical illness. This is sometimes available as a combined policy with term life insurance.

Keep in mind that critical illness insurance covers survivable illnesses with the payout designed to provide support during recovery.

On the other hand, standard life insurance policies often cover terminal illness, by paying out when diagnosed with an illness that is expected to lead to death within 12 months.

Income protection insurance can also help replace loss of earnings due to ill health, or accidental injury. The policy will pay out until you either start working again, retire, or die, or at the end of the policy term.