Life Insurance Guide
Understanding Life Insurance and How It Can Protect the People Who Depend on You
Life insurance is often discussed when somebody takes out a mortgage, but protecting a mortgage is only one reason people consider it.
The bigger question is what would happen financially to the people who depend on you if you died.
There may still be mortgage or rent payments, household bills, childcare costs, debts and everyday living expenses. A family may also lose part or all of the income that previously supported those commitments.
Life insurance is designed to provide financial protection if the person covered dies during the policy term, subject to the terms and conditions of the policy.
This guide explains how life insurance works, the different types of cover available and some of the important decisions to consider when arranging protection.
What Is Life Insurance?
Life insurance is a type of protection policy.
You pay premiums to an insurer in return for cover under the terms of the policy.
If the insured person dies while the policy is in force and a valid claim is made, the policy can pay the agreed benefit.
Depending on the type of policy selected, this may be a lump sum or another form of benefit.
The purpose of that money depends on why the policy was arranged.
It could potentially help a family:
repay a mortgage;
reduce other debts;
replace lost household income;
cover everyday living expenses;
provide financial support for children;
meet future financial commitments; or
create a financial safety net.
Life insurance should therefore be considered around the financial consequences of somebody dying rather than simply around the existence of a mortgage.
Do I Need Life Insurance?
There is no universal answer.
Life insurance is not appropriate for everybody, and the amount and type of protection required depends on individual circumstances.
A useful starting point is to ask:
Who would be financially affected if I died?
For somebody living alone with no financial dependants, the need could be very different from somebody with a partner, children and a mortgage.
Similarly, a business owner may have protection needs that extend beyond their household finances.
The purpose of protection advice is to identify those financial risks before deciding whether insurance is appropriate.
Life Insurance Is Not Just for Homeowners
A common misconception is that life insurance only becomes relevant when somebody takes out a mortgage.
It does not.
Someone renting a home can still have:
a partner;
children;
household expenses;
debts;
childcare commitments; and
people who depend on their income.
If that person dies, the mortgage may not be the problem, but the loss of their financial contribution could still be significant.
Protection should therefore be considered around people and financial responsibilities, not simply property ownership.
Life Insurance and a Mortgage
A mortgage is often one of the largest financial commitments a household takes on.
If one borrower dies, the surviving borrower may need to continue making the mortgage payments.
Life insurance can potentially provide money that helps repay or reduce the mortgage.
However, simply matching the policy to the mortgage balance may not always address the household's wider protection needs.
There may also be:
everyday household expenses;
childcare;
other debts;
reduced household income;
education costs; and
longer-term financial commitments.
Mortgage protection and family protection should therefore be considered together.
Is Life Insurance Compulsory for a Mortgage?
Life insurance is generally not a standard legal requirement for obtaining a residential mortgage.
However, that does not mean it should be ignored.
A mortgage lender is primarily assessing whether it is prepared to lend against the property.
Protection advice asks a different question:
What happens to you and your family if something goes seriously wrong after the mortgage completes?
These are separate considerations.
What Is Level Term Life Insurance?
Level term insurance provides a specified amount of cover for a specified period.
The amount of cover generally remains level throughout the policy term, subject to the policy conditions.
For example, somebody might arrange a policy designed to provide a fixed lump sum if they die during the selected term.
Level cover can be considered where the financial need is expected to remain relatively constant.
This could include family protection or supporting an interest-only mortgage where the mortgage balance is not scheduled to reduce in the same way as a repayment mortgage.
What Is Decreasing Term Life Insurance?
Decreasing term insurance is designed so that the amount of cover reduces over time.
It is commonly associated with repayment mortgages because the outstanding mortgage balance should also reduce over time if contractual repayments are maintained.
The policy and mortgage will not necessarily reduce in exactly the same way, so the precise policy terms remain important.
Decreasing cover can sometimes cost less than equivalent level cover because the amount insured reduces during the policy term.
Level Cover vs Decreasing Cover
Neither is automatically better.
The appropriate structure depends on what you are trying to protect.
Decreasing cover may be considered where the primary objective is protecting a reducing repayment mortgage.
Level cover may be considered where a fixed amount of protection is required throughout the policy term.
Some people may also have more than one protection need.
For example, part of the cover could be designed around the mortgage while another part provides additional family protection.
What Is Increasing or Indexed Life Insurance?
Some policies allow the amount of cover to increase over time.
This is designed to help the value of the protection keep pace with increasing costs.
Without increases, a fixed amount of cover may have less spending power many years later because of inflation.
Depending on the policy, increases may be linked to an index or another method specified by the insurer.
Premiums can also increase as the cover increases.
The precise mechanics vary between insurers and policies.
Single Life vs Joint Life Insurance
A single-life policy covers one person.
A couple could therefore have two separate single-life policies.
A joint-life policy covers two people under one policy.
The way a joint policy pays benefits depends on its terms. A common structure is for the policy to pay following the first insured event covered by the policy, after which the cover ends.
This creates an important difference.
With two separate single-life policies, a valid claim on one person's policy does not automatically mean the other person's separate policy ends.
The appropriate structure depends on circumstances, needs and budget.
Why Two Single Policies Can Be Different From One Joint Policy
Imagine two people each require life insurance.
With a joint policy designed to pay on the first death, a valid claim could result in the policy paying and then ending.
The surviving person would then no longer have that particular policy.
With two separate policies, one policy could potentially pay while the surviving person's own cover remains in force, subject to its terms.
This does not mean separate policies are automatically the right answer.
It demonstrates why policy structure matters, not just the total amount of cover.
How Much Life Insurance Do I Need?
There is no universal figure.
The amount should be considered in relation to the financial problem you are trying to solve.
Potential considerations include:
outstanding mortgage;
other debts;
household income;
dependants;
childcare;
education;
regular living expenses;
existing savings;
existing insurance;
employer benefits; and
how long financial support would be required.
Someone needing only mortgage protection could arrive at a very different figure from somebody wanting to provide longer-term family protection.
Start With the Financial Need
Rather than beginning with a random insurance amount, consider what would actually happen financially.
For example:
What debts would remain?
Would the mortgage need to be repaid?
How much household income would disappear?
Would childcare arrangements change?
How long would children remain financially dependent?
What savings are already available?
What protection already exists?
These questions help establish the potential financial shortfall.
Insurance can then be considered against that need.
Should Life Insurance Cover the Entire Mortgage?
It can, but that is not the only possible approach.
Some people want sufficient cover to repay the entire mortgage.
Others may have existing policies, savings or other resources that change the amount required.
There can also be additional family needs beyond the mortgage.
Protection should therefore be based on the overall circumstances rather than automatically assuming that the mortgage balance equals the correct life insurance amount.
What About Income After the Mortgage Is Repaid?
Repaying a mortgage removes one major household expense.
It does not remove every expense.
The surviving family may still need money for:
food;
utilities;
transport;
childcare;
clothing;
education;
household maintenance; and
general living costs.
If the deceased person contributed substantially to household income, clearing the mortgage may still leave a significant financial gap.
This is why family protection can be considered separately from mortgage protection.
Family Income Benefit
Some protection policies are designed to provide a regular benefit rather than one large lump sum.
Family Income Benefit can be used to provide an income for the remaining policy term following a valid claim, subject to the policy terms.
For some families, this can align more closely with replacing lost monthly income.
For example, rather than receiving one large sum that needs to support the family for many years, the policy can be structured around providing regular financial support.
Whether this is appropriate depends on the household's needs.
Life Insurance and Children
Having children can significantly change protection needs.
If a parent dies, the financial consequences can extend well beyond lost salary.
There could also be changes to:
childcare;
working patterns;
school arrangements;
household responsibilities; and
longer-term family plans.
A parent who does not currently earn a salary can also have a substantial financial value to the household.
Replacing childcare and other responsibilities previously carried out by that parent could be expensive.
Protection should therefore not automatically be based only on salary.
Life Insurance for Stay-at-Home Parents
A person does not need to earn an income to create a financial protection need.
Consider what would happen if a parent responsible for childcare and household responsibilities died.
The surviving parent might need to:
reduce working hours;
pay for childcare;
arrange additional support; or
change their working arrangements.
These costs can be substantial.
This is why protection planning should consider the person's contribution to the household, not simply their payslip.
Life Insurance for Renters
Renters can also need life insurance.
A surviving partner or family may still need to pay rent and household expenses after losing an income.
The absence of a mortgage does not remove the financial consequences of death.
The appropriate amount and structure of cover will depend on the household's circumstances.
Life Insurance for Self-Employed People
Self-employed people may have different protection arrangements from employees.
An employee may have access to benefits through their employer.
A self-employed person may not.
This can make personally arranged protection particularly important to consider.
Business owners may also have additional protection needs relating to the business itself.
What Is Death in Service?
Some employers provide a benefit that may pay money if an employee dies while employed by the organisation.
This is often called Death in Service.
It can be valuable protection.
However, it should be understood carefully.
Questions to consider include:
How much would it pay?
Who would receive the benefit?
Does it continue if you leave the employer?
Is it sufficient for your family's needs?
What other protection do you have?
Employer benefits can form part of protection planning, but relying entirely on employment-related cover can create a gap if employment changes.
Should I Replace an Existing Life Insurance Policy?
Not automatically.
If you already have life insurance, the existing policy should be reviewed before considering replacement.
An older policy may have:
different premiums;
different underwriting terms;
valuable features;
existing medical underwriting; or
terms that cannot necessarily be replicated.
Your health may also have changed since the original policy was arranged.
Cancelling existing protection before replacement cover is fully accepted and in force can leave you uninsured.
Existing policies should therefore be reviewed carefully rather than cancelled automatically.
Can I Have More Than One Life Insurance Policy?
Potentially, yes.
People can have different policies arranged at different stages of life.
For example, someone might already have family protection and later arrange additional cover when taking a larger mortgage.
The important consideration is whether the total protection remains appropriate for the financial need and circumstances.
What Is Underwriting?
Underwriting is the insurer's assessment of the risk involved in providing cover.
When applying for life insurance, you may be asked questions about areas such as:
age;
health;
medical history;
smoking;
occupation;
lifestyle;
family medical history; and
other relevant circumstances.
The insurer uses this information to decide whether it can offer cover and on what terms.
Why Are Medical Questions Important?
Insurance relies on accurate information.
Medical questions allow the insurer to assess the risk appropriately.
Depending on the application, the insurer might:
offer standard terms;
offer cover at a higher premium;
apply particular terms;
request additional medical information;
postpone a decision; or
decline the application.
The outcome depends on the individual circumstances and insurer.
Do I Need a Medical Examination?
Not always.
Many applications can be assessed using the information provided in the application.
However, depending on factors such as age, amount of cover and medical history, an insurer may request additional information.
This could include information from a medical professional or another form of medical assessment.
The exact process depends on the insurer.
Why Is Full Disclosure Important?
Questions on an insurance application should be answered accurately and completely.
If relevant information is omitted or incorrectly disclosed, it can affect how a future claim is assessed.
If you are unsure how to answer a question, it is better to seek clarification than to guess.
Protection only provides confidence when the policy has been arranged correctly.
Does Smoking Affect Life Insurance?
It can.
Insurers generally consider smoking and certain nicotine use when assessing applications.
Definitions and time periods can vary between insurers.
Applicants should answer the insurer's questions accurately rather than assuming how they will be classified.
Does My Occupation Matter?
Potentially.
Occupation can be relevant to underwriting, particularly where work involves unusual hazards.
For straightforward life insurance, health and lifestyle factors may often have a greater influence, but each insurer applies its own underwriting approach.
What Is a Policy Term?
The policy term is the period for which the insurance is intended to provide cover.
For mortgage protection, this may sometimes be aligned with the mortgage term.
For family protection, the term might instead be based on how long financial support is expected to be needed.
For example, someone might consider how long children are likely to remain financially dependent.
There is no universal correct term.
What Happens When the Policy Term Ends?
For term life insurance, the cover generally ends when the policy term expires.
If no valid claim has occurred, there is normally no lump sum simply because the policy reached its end date.
This is one reason the policy term should be selected carefully at the outset.
What Happens If I Stop Paying the Premium?
Protection policies generally require premiums to continue being paid.
If premiums stop and the policy lapses, the cover may end.
The exact process depends on the policy terms.
If affordability becomes a problem, it can be sensible to discuss the situation before simply cancelling the policy.
Can Life Insurance Be Changed Later?
Possibly, depending on the policy.
Some policies may include options that allow changes following particular life events or under specified conditions.
However, increasing cover later may sometimes require additional underwriting.
It should not be assumed that more insurance will always be available in the future on the same terms.
Life Events That Can Change Protection Needs
Protection should not necessarily be arranged once and then forgotten.
It can be useful to review cover after major life changes such as:
buying a home;
increasing a mortgage;
getting married;
having children;
changing employment;
becoming self-employed;
starting a business;
divorce or separation;
moving home; or
significant changes in household income.
The appropriate protection today may not remain appropriate indefinitely.
What Is Critical Illness Cover?
Critical illness cover is different from life insurance.
Life insurance is primarily designed to pay following death during the policy term, subject to the policy conditions.
Critical illness cover is designed to provide a benefit if the insured person is diagnosed with a condition covered by the policy and meets the insurer's definition.
Someone can survive a serious illness but experience substantial financial consequences.
This is why life insurance and critical illness cover address different risks.
What Is Income Protection?
Income protection is also different.
It is designed to provide an income if illness or injury prevents the insured person from working and the policy's definition of incapacity is satisfied.
Life insurance protects against the financial consequences of death.
Income protection addresses the financial consequences of being unable to work because of illness or injury.
A protection plan may therefore involve several different types of cover rather than relying on one policy to address every risk.
Life Insurance vs Critical Illness vs Income Protection
A simple way of thinking about the three is:
Life insurance — what happens financially if I die?
Critical illness cover — what happens financially if I survive a serious illness covered by the policy?
Income protection — what happens financially if illness or injury prevents me from working?
They solve different financial problems.
The appropriate combination depends on individual circumstances and priorities.
What Is a Trust?
A trust is a legal arrangement that can sometimes be used in connection with life insurance.
Depending on the circumstances and policy, placing life insurance in an appropriate trust can help determine who should benefit from the policy proceeds and may affect how the benefit is administered following a claim.
Trusts have legal implications and need to be completed correctly.
Whether a trust is appropriate depends on individual circumstances, and legal or tax advice may be required where appropriate.
Who Should Receive the Money?
This is an important part of protection planning.
It is not enough simply to arrange a policy and ignore what should happen to the proceeds.
Consider:
who you want to benefit;
why the cover was arranged;
whether there are children involved;
whether the mortgage should be repaid;
whether the money is intended to provide longer-term family support; and
whether appropriate legal arrangements are required.
Protection planning should consider the destination of the benefit as well as the amount insured.
Life Insurance Is About More Than Finding the Cheapest Premium
Price matters.
However, protection should not be compared solely by monthly premium.
Policies can differ in:
features;
definitions;
options;
underwriting;
flexibility;
additional benefits; and
policy conditions.
The cheapest policy is not automatically the most appropriate policy.
The objective is to arrange cover that addresses the financial risk you are trying to protect against while remaining affordable.
What Happens During a Life Insurance Application?
A typical protection process may involve the following stages.
1. Identify the Financial Risk
Consider who depends on you financially and what would happen if you died.
2. Review Existing Protection
Existing personal policies, employer benefits and other resources can be considered.
3. Establish the Amount of Cover
Mortgage debt, other liabilities, family needs, income and existing resources can help determine the potential protection requirement.
4. Decide How Long Cover Is Needed
The policy term can be considered in relation to the mortgage, children, retirement or other financial commitments.
5. Consider the Type of Cover
Level, decreasing, indexed or other appropriate structures can be considered.
6. Research Insurers
Potential insurers and policy options can be assessed.
7. Complete the Application
Health, lifestyle and other underwriting questions are answered accurately.
8. Underwriting
The insurer assesses the application and may request further information.
9. Terms Are Offered
The insurer confirms whether cover can be offered and on what terms.
10. Policy Begins
Once the appropriate requirements have been completed and the policy starts, the cover operates according to its terms and conditions.
Life Insurance Checklist
When reviewing life insurance, consider:
mortgage balance;
other debts;
household income;
partner or spouse;
children;
other dependants;
childcare;
household expenditure;
existing savings;
existing life insurance;
employer benefits;
required amount of cover;
policy term;
level or decreasing cover;
whether inflation should be considered;
single or joint policies;
affordability of premiums; and
who should ultimately receive the benefit.
The objective is not simply to buy an insurance policy.
It is to understand the financial problem first and then consider how protection could address it.
Speak to Cambs Ely Mortgages About Life Insurance
Whether you're buying a home, reviewing existing protection, starting a family or simply want to understand what would happen financially if you were no longer there, we can discuss your circumstances and protection priorities.
Protection can involve more than simply matching life insurance to a mortgage. We can consider your mortgage, household income, dependants, existing policies and employer benefits before discussing suitable protection options.
Cambs Ely Mortgages provides mortgage and protection advice to clients in Ely, Cambridge, Cambridgeshire and across England, with remote appointments available.
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Important Information
The information contained in this guide is intended for general educational purposes and does not constitute personalised financial, insurance, legal or tax advice.
Life insurance availability, premiums, underwriting decisions, policy features, exclusions and terms depend on individual circumstances and the insurer.
Policies have specific terms, conditions, definitions and exclusions which should be understood before proceeding.
Protection needs can change over time, so existing arrangements may need to be reviewed following significant changes in personal or financial circumstances.
Do not cancel an existing protection policy until any replacement cover has been accepted, is in force and you understand the consequences of replacing the existing policy.