Life Insurance
About life insurance
Life insurance pays a lump sum to your family if you die. You choose how much cover you want and how long it should run for, and the insurer prices a monthly premium based on your age and health.
Plenty of policies never pay out. Term cover only lasts as long as the term you picked, so if you outlive it, it ends and nothing comes back. That's why the premiums are as low as they are.
Taking out a life insurance policy is straightforward. Setting it up correctly takes more work. The cover has to be large enough to clear the mortgage and replace your income for as long as your family would need it, and the term has to run at least that long. Most policies should also be written in trust. Without one, the payout falls into your estate, and your family could be waiting on probate before they can reach it.
At Vintage Wealth Management, we advise on life cover alongside your mortgage, your pension, your estate and the rest of your protection. We'll look at what you've already got in place, including any cover through work, and recommend from across the whole market.
What is life insurance and how does it work?
Life insurance pays out if you die during the period you're covered for. You apply, the insurer asks about your age, health, job and lifestyle, and prices a monthly premium from your answers. If you die while the policy is running, your family claims and the insurer pays the lump sum.
Age affects the price of life insurance more than anything else. A healthy 30-year-old non-smoker can usually get £200,000 of level term cover over 25 years for £8 to £15 a month. At 50, the same cover costs several times that. Smoking roughly doubles the premium at any age, and health conditions, a risky job or a family history of illness can push it higher still.
Policies pay out on death and on terminal illness, meaning a diagnosis with less than 12 months to live. They won't pay if you stop the premiums or outlive the term.
The other thing that trips claims up is disclosure. If you don't tell the insurer something at application that would have changed the price, the payout can be reduced. It's rarely deliberate and rarely the outcome, though, with the industry paying 97.9% of individual protection claims and having done so for a decade.
Cover through your employer is death in service, and it works differently. It's usually three or four times your salary, and it ends the day you leave the job.
What are the different types of life insurance?
Whole of life
Level term assurance
Decreasing term assurance
Family income benefit
Joint life policies
Life insurance splits into term assurance and whole of life. Term life insurance covers you for a fixed number of years and pays out only if you die inside that window, which is why it's cheap. Whole of life insurance has no end date, so the insurer knows it will pay eventually, and level term averages around £25 a month against roughly £100 for whole of life.
Whole of life insurance covers you until you die, whenever that happens, so the payout is guaranteed. Certainty is what makes it expensive, at roughly four times the cost of level term for the same sum assured. It's bought for a bill that arrives with your death rather than before it, which almost always means inheritance tax. Written in trust, the policy pays your family the cash to settle HMRC without selling the house.
Level term life insurance pays a fixed lump sum if you die during the term. The cover stays the same throughout, so £300,000 in year one is still £300,000 in year twenty. It's the standard choice for replacing an income, covering an interest-only mortgage, or leaving your family a sum that isn't tied to a particular debt. A healthy 30-year-old non-smoker might pay £8 to £15 a month for £200,000 over 25 years.
Decreasing term assurance pays a lump sum that falls each year, roughly tracking the balance of a repayment mortgage. It's cheaper than level term, usually by around a third, because the insurer's exposure shrinks as you pay the mortgage down. Cost is why it's the common choice for mortgage life insurance. The limit is that it only ever covers the debt, so if your family needs money for anything beyond the house, it won't be there.
Family income benefit pays a monthly income instead of a lump sum, running from your death to the end of the term. If you take out a 20-year policy paying £30,000 a year and die in year fifteen, your family receives £30,000 a year for the remaining five. It's cheaper than level term because the total paid out shrinks as the term runs down. It suits families who'd rather replace a salary than manage a large sum.
A joint life policy covers two people and pays out once. Nearly all are written on a first death basis, so the money goes to the survivor and the policy ends. Second death policies pay when both have died, which is how life cover is usually arranged for inheritance tax, since that's when the bill lands. A joint policy costs less than two singles but leaves the survivor with no cover, and they'll be older and dearer to insure by then.
Relevant life cover
Relevant life cover is a death in service policy for a single employee, paid for by the company. It suits directors of small companies who don't have enough staff for a group scheme. The premiums are usually an allowable business expense rather than a benefit in kind, and the payout goes into a discretionary trust outside the estate. For a higher-rate taxpaying director, that makes it a cheaper way to hold personal life cover.
Level term vs decreasing term life insurance
Level term life insurance pays the same lump sum whenever you die during the term. Decreasing term pays less each year, roughly following the balance of a repayment mortgage. Decreasing term costs around a third less, because the insurer's exposure shrinks as you pay the mortgage down.
Decreasing term tends to suit you if the mortgage is the only thing you're covering and it's on a repayment basis. Level term tends to suit you if your family needs an income after you've gone, if the mortgage is interest-only, or if you want something left for them once the house is paid for.
| Level term | Decreasing term | |
|---|---|---|
| Payout | Fixed. Same in year one and year twenty | Falls each year, tracking a repayment mortgage |
| Cost | Higher | Around a third less |
| Suits | Income replacement, interest-only mortgages, a lump sum for the family | Repayment mortgages |
| Left over | Whatever the debt doesn't take stays with your family | Little to nothing once the mortgage is cleared |
| Premiums | Fixed for the term | Fixed for the term |
| Written in trust | Yes | Yes |
Should you write your life insurance in trust?
Writing a policy in trust hands legal ownership to trustees, who hold it for the people you name. When you die, the insurer pays the trustees and the trustees pay your family. Nothing passes through your estate.
Keeping the payout out of your estate is what saves the tax. A £300,000 policy on an estate already over the £325,000 nil-rate band would hand HMRC £120,000, and a trust prevents that. Your family also gets the money in weeks instead of waiting on probate, which takes six or seven months on a simple estate and longer on a complicated one. The mortgage still needs paying during those months.
Setting one up is usually free. Insurers provide the trust deed with the policy, the premium doesn't change, and you name your trustees and beneficiaries on the form. The decision is which type of trust. A bare trust fixes the beneficiaries from the start and can't be changed afterwards, which is clean but rigid. A discretionary trust lets the trustees decide who receives what as circumstances change, though larger trusts can face a charge every ten years.
An existing policy can be moved into trust later. Cover bought through a comparison site or a lender often isn't.
Why work with Vintage Wealth Management.
Why work with Vintage Wealth Management.
Vintage Wealth Management has advised on protection and tax-efficient planning for over a decade. We're named in the FT Adviser UK Top 100 Financial Advisers every year since 2021, our team includes Chartered Financial Planners and Fellows of the Personal Finance Society, and we're authorised and regulated by the Financial Conduct Authority.
We have offices in Central London, North West London, Portsmouth, Buckinghamshire, Swindon, and Dublin.
Life insurance rarely sits on its own, so we look at it alongside your mortgage, your pension, your estate and the rest of your protection. When you're ready, get in touch with our advisers.
Frequently asked questions about life insurance
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The policy ends and nothing is paid out. Term life insurance covers you for a fixed number of years, so if you're still alive when the term finishes, the cover stops and the premiums stop with it. You get nothing back. If you still need cover at that point, you'd apply for a new policy at your current age.
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Life insurance won't pay out if you outlive the term or stop paying the premiums. Claims can also be affected if something wasn't disclosed at application that would have changed the price or the cover. Payouts are otherwise wide, with the industry paying 97.9% of individual protection claims and having done so for a decade.
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Yes. There's no limit on how many policies you can hold, and layering is common. You might have decreasing term against the mortgage, level term for your family's income, and death in service through work. Each pays out separately. Insurers will ask about existing cover and may query a total that looks high against your income.
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The payout itself is free of income tax and capital gains tax. Inheritance tax is the exception. If the policy isn't written in trust, the money lands in your estate, and anything above the nil-rate band is taxed at 40%. A trust keeps it outside the estate and pays your beneficiaries directly.
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Only if the policy isn't written in trust. A policy paid into your estate counts towards its value, so a £300,000 payout on an estate already above the £325,000 nil-rate band could hand HMRC £120,000. Writing the policy in trust costs nothing and keeps the payout out of the calculation.Only if the policy isn't written in trust. A policy paid into your estate counts towards its value, so a £300,000 payout on an estate already above the £325,000 nil-rate band could hand HMRC £120,000. Writing the policy in trust costs nothing and keeps the payout out of the calculation.
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Whenever the need starts, which for most is a mortgage or a first child. Premiums rise with age and with any health condition you pick up, so the same cover bought at 40 costs roughly double what it would at 30. Buying before you need it is rarely useful, but delaying once you do is expensive.
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Nothing meaningful in the UK today. Both terms describe a policy that pays a lump sum on death. Life assurance is sometimes used for whole of life policies, where a payout is certain, and life insurance for term policies, where it's conditional on dying inside the term. The distinction isn't consistent between insurers.
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Neither is better across the board. Term life insurance suits a need that ends, like a mortgage or the years before your children are independent, and it costs around a quarter of the alternative. Whole of life suits a bill that arrives whenever you die, which almost always means inheritance tax.
Disclaimer
The information supplied is based upon our understanding of current UK law and HM Revenue and Customs (HMRC) practice. Tax law and HMRC practice may change from time to time. The value of any tax relief will depend on the individual circumstances of the investor. Life insurance pays out only while the policy is in force. Cover ends if premiums stop, or when the term finishes if you outlive it, and no benefit is returned. Premiums, cover, exclusions and terms vary between insurers and depend on factors including your age, health, occupation and lifestyle at the time of application. Failure to disclose relevant information when applying may affect a claim. Premium figures quoted are illustrative and not a quotation. The Financial Conduct Authority does not regulate tax planning, trusts, or will writing. The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied, is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.