Why life insurance is important

Life insurance is often overlooked or misunderstood, but it plays a crucial role in protecting your family’s financial future.

Whether you’re just starting out, have a growing family, or are approaching retirement, having a life insurance policy can provide peace of mind, knowing your loved ones will be financially secure after you’re gone.

This guide will walk you through why life insurance is important, how it fits different stages of life, and what you need to consider when selecting the right policy.

What is life insurance?

Life insurance is a contract between you and an insurance provider where you agree to pay premiums, and in return, the insurer pays a lump sum to your beneficiaries when you pass away. This payout can help cover expenses such as funeral costs, debts, or living expenses for your family.

There are different types of life insurance, each offering a range of benefits and costs, depending on your financial goals and personal circumstances. We’ll cover those in more detail later in the guide.

Why is life insurance important?

1. Financial security for your loved ones

One of the key benefits of life insurance is the financial safety net it offers your loved ones in case of your passing. If you’re the main earner or contribute significantly to the household, your family may struggle to maintain their lifestyle without your income. Life insurance is important because it provides a payout that helps your family cover bills, everyday expenses, and any future financial needs.

2. Paying off debts and mortgages

Another key benefit of life insurance is that it covers large debts, such as a mortgage or personal loans, helping to protect your family. When you pass away, any outstanding debts need to be paid from your estate. If your family doesn’t have the means to cover these costs, they could be left with financial difficulties.

A life insurance policy can help clear these debts, so your loved ones don’t face the added burden.

3. Covering funeral expenses

Funeral costs can add up quickly, with the average funeral in the UK costing between £4,000 and £5,000. Without proper planning, this financial burden can fall on your family at a difficult time. Life insurance is important because it can help cover these costs, easing the pressure on your loved ones.

4. Providing for your children’s future

If you have children, life insurance is one way to provide for their future in case something happens to you. The payout can be used to fund education, pay for childcare, or simply ensure they have the financial resources to thrive as they grow up. Life insurance allows you to leave a lasting legacy for your children, giving them a secure foundation even if you’re no longer around.

Deciding how much life insurance you need is very important, especially when considering your children’s future needs.

5. Supporting dependents or partners

Life insurance is important even if you don’t have children, as it can provide financial protection for your spouse, partner, or other dependents who rely on your income.

Whether it’s helping to cover day-to-day living expenses, paying off joint debts, or providing for long-term care, life insurance offers much-needed support.

Life insurance without dependents is still a valuable tool for protecting partners or other loved ones.

Types of life insurance explained

Term and whole life insurance

When choosing life insurance, there are two main options: term life and whole life insurance.

• Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. If you pass away during this term, the policy pays out to your beneficiaries. However, if the term ends and you’re still alive, the coverage stops unless you renew or convert the policy. Term insurance is typically cheaper and is often used to cover temporary financial obligations like a mortgage.
• Whole life insurance provides lifelong coverage, meaning your beneficiaries will receive a payout regardless of when you pass away. Whole life insurance also includes a savings component, where part of your premium goes towards building cash value that you can borrow against. However, it’s more expensive than term insurance because of the lifetime coverage and cash value.

If you’re unsure which type you need, our guide on term vs whole life insurance can help you make the right decision.

Specialised policies and addons

In addition to standard term and whole life insurance, there are several specialised life insurance options designed to meet the needs of specific groups or circumstances.

Mortgage protection insurance

For homeowners, mortgage protection insurance (also known as decreasing term life insurance) is a specialised policy designed to pay off your mortgage if you pass away before the loan is fully repaid.

The payout decreases over time in line with your outstanding mortgage balance, ensuring that your loved ones won’t be burdened with the mortgage payments after you’re gone. This type of policy is ideal for those looking to protect their biggest asset without the need for broader life insurance coverage.

Critical illness cover

Critical illness cover is an add-on or standalone policy that provides a lump sum payout if you’re diagnosed with a serious illness, such as cancer, heart attack, or stroke.

This payout can be used to cover medical costs, replace lost income, or make necessary adjustments to your home during recovery. Unlike traditional life insurance, critical illness cover pays out while you’re still alive, helping to ease the financial burden of long-term medical care or reduced earning capacity.

Over 60s life insurance

Over 60s life insurance is designed specifically for individuals over the age of 60, providing affordable coverage without the need for a medical exam.

The main benefit of life insurance for over-60s is that the payouts can be used to cover final expenses, such as funeral costs, or to leave a financial gift to loved ones. While the payout amounts may be smaller compared to traditional life insurance, over 60s policies give older individuals peace of mind that their families won’t face financial strain after they pass away.

Common life insurance myths debunked

Many people delay getting life insurance due to misconceptions or misinformation. Let’s clear up some of the most common myths:

• “Life insurance is too expensive”: Life insurance can actually be very affordable, especially for young and healthy individuals.
• “I don’t need life insurance if I’m single”: Even without dependents, life insurance can cover debts, funeral expenses, or provide a financial gift to friends or family.
• “My employer’s policy is enough”: Most workplace policies offer limited coverage, often only one to two times your salary. It’s usually not enough to fully protect your family.

Read more about common life insurance myths and the truth behind them.

How much life insurance do you really need?

To determine how much coverage you need, consider factors like your income, debts, mortgage, and future financial needs for your family. Many experts recommend having a policy that provides at least 10 times your annual income, but this may vary depending on your situation.

Find out how much life insurance you really need in our detailed guide.

What happens if you outlive your life insurance policy?

If you have term life insurance and outlive your insurance policy, the coverage will end. You won’t receive a payout, but that doesn’t mean the policy was a waste. You had protection during the years when your family needed it most.

At this point, you can choose to renew the policy, convert it to whole life insurance, or simply let it expire if your financial situation no longer requires coverage.

How life insurance helps with inheritance tax

In the UK, life insurance payouts are generally tax-free, but if the payout forms part of your estate, it may be subject to inheritance tax.

One way to avoid this is by writing your policy in trust, which keeps the payout separate from your estate and free from inheritance tax. This ensures your loved ones receive the full benefit without losing a portion to taxes.

Life insurance for different life stages

Young adults and life insurance

Getting life insurance early has many benefits. Premiums are lower when you’re young and healthy, allowing you to lock in affordable coverage that lasts throughout your life. It’s also a smart way to plan for future family and financial obligations.

Life insurance for families

For families, life insurance is a way to provide financial protection in case something happens to one or both parents. The payout can cover living expenses, education costs, and ensure your family’s future is secure.

Life insurance for retirees

Even in retirement, life insurance can play an important role. Over 60s life insurance is designed to cover final expenses and provide for loved ones, even if you no longer have dependents or large financial obligations.

Learn more about life insurance for different stages, and decide what’s right for you.

Final thoughts

Life insurance is a key part of financial planning at every stage of life. Whether you’re young and building a family or looking to protect your estate in retirement, having the right life insurance is important, as it provides peace of mind and financial security for your loved ones.