What Is Life Insurance & How Does It Work?

Life insurance helps to protect your loved ones financially should you pass away. But what exactly does it involve and how does it work?

Read the full article 

What Is Life Insurance & How Does It Work?

Most of us insure our homes, our cars and even our phones without a second thought, yet doing so for our own deaths isn’t always as automatic.

Have you considered the financial impact on your family if you were to suddenly pass away? While nobody likes to think about death, you just never know what is around the corner in life.

The pandemic has given us a stark reminder about the fragility of life, and has made many of us think more closely about life insurance as a result.

Most of us insure our homes, our cars and even our phones without a second thought, yet doing so for our own deaths isn’t always as automatic. However, it should be.


Looking for advice on which life insurance policy to take?

That’s what we’re here for! If you’d prefer to talk to someone in person to discuss your options and weigh up the pros and cons, please don’t hesitate to get in touch. Our experienced team of financial advisors are here to help.

Get in touch

Peace of mind knowing that your family is protected

By obtaining life insurance (alternatively called “life cover” and “death cover”), you minimise the impact of your passing on your family. Having life insurance means family members will receive a sum of money in the event that you do unexpectedly pass away, helping to ensure they remain financially protected during an already difficult time.

When obtaining life insurance, you’ll select the amount of cover you require and how long you need it for. How much you’ll pay depends on aspects like the amount of cover you get and the length of your policy, as well as factors like your age, health and lifestyle. For instance, those who smoke can expect to pay more for a life insurance policy owing to the associated health risks.

The main things to consider when securing a life insurance policy are:

  • What you need to protect
  • How much cover you require
  • How long you need the cover for

Financial safety when others depend on your income

Not everyone needs a life insurance policy. However, if you have a partner, children or other relatives who rely on your income to cover a mortgage or other living expenses, then you definitely do. Otherwise, they will likely find themselves unable to sustain themselves financially in the event of your death.

How much money your loved ones will need ultimately depends on your financial circumstances. Of course, you need enough life insurance cover for them to pay off your mortgage and other financial liabilities. Past that, it’s up to you to work out how much of your income needs replacing. Consider what would be enough for your family to maintain their current way of life.

It will depend on your life stage

When building your life insurance policy, you’ll set the amount you want to be paid out in the event of your death — this is called the ‘sum assured’. It’s important to regularly check in on this figure as your circumstances change, or you run the risk of being under-insured as key events take place in your life. Circumstances like having children or taking on added debts will alter how much money your dependents will need after your death.

The two basic life insurance types

There are two main types of life insurance: “term life” and “whole-of-life”, which both come in different variations.

Term life insurance

This is the cheapest, most straightforward type of life insurance. Quite simply, it pays out a lump sum if you die within a specified period — common terms are 10, 20 and 30 years. There are various kinds of term insurance, such as yearly renewable term (YRT) policies that change from year to year, and decreasing term policies, where the death benefit decreases each year.

Whole-of-life insurance

As the name suggests, whole-of-life insurance is intended to provide you with cover for the duration of your life. Like with term life insurance, it only pays out once the policyholder dies, but there is no need to renew the policy at any point as you’re covered for life. Depending on the policy, you may have to continue contributing to it until your death, or stop doing so once you reach a particular age.

Understanding what you need to protect

Every person has different life circumstances, meaning the amount of cover you need and how long it should last for depends on your unique situation. When obtaining a life insurance policy, be sure to ask yourself the following questions:

  • Who are your financial dependents? These are typically your spouse or partner, children and other family members.
  • What level of financial support does your family currently enjoy?
  • What level of financial support will your family require in the future?
  • What kind of costs will the policy need to cover, such as mortgage payments, living costs, education fees, debts and funeral costs?

Understanding when it's time to review

There are various events that should prompt you to reevaluate your life insurance policy, including:

  • Getting your first mortgage
  • Having a child
  • Getting married or entering into a registered civil partnership
  • Moving to a bigger property
  • Changing your job
  • Receiving a significant pay rise
  • Reaching retirement
  • Relying on others to support you
  • Becoming a guarantor

Understanding the expenses and debts that might be left behind

Broadly speaking, you require enough life insurance cover so that the sum assured takes away the burden of your debts from your family. That said, you may also want enough left over for them to use for investments so they have an income going forward.

The first thing to clarify when obtaining a life insurance policy is what exactly you need it for. If you just want to cover your mortgage, then a figure equal to the outstanding mortgage debt is sufficient. However, to ensure your family aren’t financially disadvantaged by your death and can continue their current lifestyle, there are a few other aspects to consider. These include:

  • Your family expenses and how these would change if you died
  • How much their expenditures would rise due to increased spend on things like childcare due to your death
  • The amount your family’s income would drop if you passed away
  • How much cover you get from your employer or company pension scheme, and for how long
  • The existing policies you have and how far they go to meeting your dependent’s needs
  • How long your existing savings would last
  • The state benefits available that could provide extra support to your family
  • The state of the economy and how this impacts your cover over time

If you’re unsure where to start with life insurance, then be sure to get in contact with the team here at Oury Clark.

Arrange a free consultation

Margot had hoped to inherit the entire family art collection.

Wouldn’t you prefer to know how to best look after your most precious assets?

Learn more

Our Financial Services 

Straight Talking Financial Advice Since 1935 

We have the expertise to give you the advice that you need to make smart choices for the future.

Get in touch and see what we can do for you.

  Arrange a free consultation