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Do I need life insurance? The answer is probably yes.

11–13 minutes to read

If you have ever asked yourself ‘do I need life insurance?’ then the answer is probably yes. Fundamentally, life insurance is designed to protect the people you love from financial hardship should the worse happen to you. So, if you have people who rely on you financially, then life insurance should be one of your top priorities. In fact, getting life insurance early before starting a family may actually save you money.

There’s a few things to consider when working out the right policy for you, such as how much you need, how long you need it and what you can afford. In this guide, we’ll run you through how life insurance works and the different types available. Plus, we’ll look at what cover you may need and what to check before buying life insurance.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

Who needs life insurance?

Life insurance protects your loved ones from financial hardship should you no longer be around. Essentially, life insurance is designed to ensure those who rely on you financially, are still taken care of.

Of course, everyone’s situation is different. Typically though, anyone with dependants should be seriously considering purchasing a life insurance policy.

The simple test is to ask yourself; if you were not around, how would your family cope and pay the bills and mortgage? If they would struggle to do this, then it’s time to think about getting some cover.

What is life insurance?

Life insurance is a policy that pays out a lump sum if you die. Additionally, most policies will also payout early if you have been diagnosed with a terminal illness and are not expected to live longer than 12 months.

It is designed to provide a financial safety blanket for your loved ones after you’re gone.

Like all insurance policies, you get to choose the level of cover you require. In simple terms, you will need to decide how much money your dependents would need should you not be there to support them.

How does life insurance work?

Essentially, life insurance provides cover for the duration of your life insurance contract. Unlike other insurances, the life of the contract can be until your death or for a fixed period such as 20 years, for example.

That’s not to say that you are tied into your contact for 20 years. You can usually cancel after a minimum term. However, the insurer is agreeing to keep your premiums, that is your annual/monthly cost, the same during the contract term.

Fundamentally, you choose the amount of cover you require and how you want it paid out. For example, you could choose a figure of £200,000 as your cover. This means, upon your death or terminal diagnosis, the insurance company would pay out £200,000 to your loved ones.

Of course, like all insurance, policies do vary and choosing your coverage can be tricky, so let’s get into more detail.

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What are the different types of life insurance?

There are two main types of life insurance policies. These are whole of life policies and term based policies.

1. Whole of life insurance policies

With whole life insurance policies, as long as you keep paying your premium you’ll be covered until you pass away.

These can be more expensive than policies with a fixed term and if you live for a long time, the total cost of the monthly premiums may end up more than the cover is worth.

2. Term life insurance policies

As the name suggests, with term life insurance policies, you’ll get coverage for a fixed term. Terms are usually calculated in years and the policy will only pay out if you pass away during the term of coverage.

There are a few types of term life policies, so you need to think carefully before choosing the policy that’s suitable for you. These are:

  • Level – the payout or amount of cover you have is the same for the term of the policy.
  • Decreasing – the amount of cover reduces over the term. For example, you may require less cover as you get older because your mortgage reduces over time.
  • Increasing – the amount of cover increases over the years to keep pace with inflation.

What about insuring my partner?

Partners can be covered under one policy. This is called a joint policy. Alternatively, each of you could take out a single policy.

A joint policy is usually cheaper. However, this type of cover pays out on the first death. After this point, the policy is complete. In contrast, buying two single policies would payout after each death.

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Do I need life insurance?

It’s important to understand that life insurance only pays out when you die. It does not cover you for illnesses or the loss of your ability to work, for which there are separate insurance policies. For example, you can often supplement a life insurance policy with critical illness cover, if you feel you need this additional level of protection.

You should consider life insurance if you have:

  • Children or dependents who are still at home.
  • A partner who doesn’t work or relies on your income to pay the bills.
  • A mortgage and you are living in the house with other family members.

You may choose not to have life insurance if:

  • You are single.
  • There is no mortgage.
  • Your partner earns enough to cover all the bills.
  • You are on a low income and could qualify for benefits.

Are you covered already?

Many employers offer ‘death in service benefit‘. If your employer offers this it means they will pay out a tax-free lump sum if you die. Crucially, this only covers you while you are working for the employer and you may need to meet certain criteria to be eligible.

If your employer does offer this benefit and you qualify, you’ll already have a certain level of cover.

Typically, death in service benefit is two to four times your annual salary. However, once you calculate this amount, you may find it’s not enough to keep your family financially secure. If not, then you’ll need enough life insurance to make up the difference.

How much life insurance cover do I need?

To calculate how much life insurance you will need consider the areas below:

  • Mortgage – if you have a mortgage, find out how much is outstanding. If you want your dependents to be mortgage-free, you’ll need enough coverage to pay this off.
  • Rent – if you are renting, how much will your dependants need to cover the rent. This is likely to increase over time, so you’ll need to add extra to cover this.
  • Debts – any debts will need to be paid off, otherwise, they will be deducted from your estate, meaning this money won’t go to your dependants. Make sure you add enough to cover all your debts, including credit cards.
  • Cost of living – how much do your family spend each year? If you are the main provider, you’ll need to replace your income. Don’t forget to include childcare and educational costs.
  • Any extra – if you were not there, would your dependants incur any additional costs? For example, your partner might need to reduce the hours worked to support the family more. Additionally, would you like to leave them a little extra?

Once you have tallied up these figures you’ll have a good idea of how much cover you need. Don’t forget, you can also subtract any death in service benefit you get from your employer.

Finally, your budget may determine the amount of cover you can afford. If you can’t afford enough cover, then you may be better working on lowering your monthly budget or trying to save more aggressively. If this sounds like you, check out How to budget like a pro in seven easy steps.

Remember, you can always add additional cover once you can afford it.

How much does life insurance cost?

How much you pay for life insurance will depend on the following factors:

  • Cover – how much cover do you need?
  • Policy – the type of policy you choose will also affect the price.
  • Term – the length of the policy impacts the cost.
  • Age – typically, the older you, are the more expensive it will be.
  • Health – if you’ve been a smoker or have underlying health issues, you’re going to pay more.

There are many online calculators to help you work out roughly how much you’ll pay. However, a more comprehensive approach is to speak with a specialist. They’ll run through the key types of cover and advise on a suitable policy, tailored to your specific needs.

If you want to find a suitable local specialist, check out Unbiased and search for ‘Financial Advisor’ and then filter down to ‘Insurance & protection’. You’ll get a list of a range of suitable professionals who have all been pre-vetted.

Check out our Unbiased review here.

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Is life insurance worth it?

Ultimately the value of life insurance will depend on each individual. Personally, I have a combination of death in service benefits and life insurance.

I have designed my cover to ensure my children have enough money to complete their education.

Additionally, I have allocated a budget to their mother to help ensure they won’t endure financial hardship.

Finally, I have added a bit extra so they have enough for a deposit on their first homes.

Don't forget to write a will

If you are in the process of working out what will happen to your loved ones if you’re no longer around, then don’t forget about your last wishes.

A will ensures your last wishes are respected. It’s really, really important. Otherwise, your family could be left to guess what you wanted and may not get anything at all. This may cause conflict and bring your loved ones additional stress at an upsetting time.

A will can be written online for around £100. It’s a good option if your requirements and circumstances are straightforward. Plus, it’s a simple process that can be completed in less than an hour.

If your situation is a little more complex, you may want to consider using a solicitor; How to make a will in the UK – online vs solicitor.

Finally, a will does not overrule a life insurance policy. A life insurance policy is a legal contract, so ensure when you name your beneficiaries they are correct. And if things do change in future, make sure you update your policy.

The following articles will help you write a will that’s right for you:

Do I need life insurance? - final thoughts

If you have dependents that you want to ensure are financially secure when you pass on, then life insurance is a must. It will provide you peace of mind that your loved ones will be taken care of.

However, don’t forget to check if you already have some cover. It’s worth checking with your employer what protection they provide to ensure you don’t unnecessarily break your budget.

Of course, if you’re getting your protection sorted, don’t forget about your will. It’s one of the most overlooked financial tools that cause families much disruption at a time when emotions and stress levels are running high.

Choosing life insurance can be tricky, as it’s not like the usual insurances we pick each year for our houses and cars. That’s why I feel it’s worth talking to someone who can help you through the process. You can find a local professional using Unbiased.

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Here’s to Financial Fitness.

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.