Do you need life insurance?

Life insurance can provide financial support to loved ones once you have passed away.

While it involves making regular payments throughout your lifetime, known as premiums, having a policy in place could be important for families, helping them to tackle important life administration like paying immediate bills, including inheritance tax.

What does taking out a life insurance policy involve, and do you need life insurance? Here's everything you need to know.

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How does life insurance work?

Life insurance works as a safety net to offer family, friends or loved ones a lump sum payout in the event of your death.

It is intended to ensure beneficiaries are not left with a financial burden when the policyholder passes away.

After taking out life insurance, a person will usually make regular payments in return for a lump sum paid to beneficiaries when they die, intended to help cover living expenses, debts, funeral costs or even an inheritance tax bill.

The monthly or annual premium you pay varies according to age, health and lifestyle, while the amount the insurer finally pays out is dependent on the level of coverage a person chooses.

What types of life insurance policies are there?

There are several types of life insurance policies a person could take out, depending on their circumstances and the sort of coverage they want.

One of the most common types of life insurance in the UK is term life insurance: a policy which provides cover for a set period. With term life insurance, if a policyholder dies within the term, then a payout is made to their nominated beneficiaries. However, if they outlive the term, no payment is provided.

There are three types of term life insurance. Level-term life insurance will pay a fixed sum, while decreasing term life insurance will see a payout reduced over time. Finally, increasing term life insurance involves a payout increasing over time to keep pace with inflation.

Whole-of-life insurance is also a popular option, as unlike term life insurance policies, this arrangement covers the policyholder for their entire life. Beneficiaries are guaranteed a payout when the policyholder dies. Whole-of-life insurance is the type of cover most people tend to take out to plan and pay for an inheritance tax bill.

Other forms of life insurance offer coverage for individuals in specific circumstances.

Over 50s life insurance typically offers acceptance onto a life insurance policy without medical checks. With this type of policy, the payout tends to be lower.

A family income benefit (FIB) arrangement does not involve a lump sum payment, instead providing regular tax-free payments to beneficiaries, which could be suitable for covering lost income if the policyholder dies.

Finally, there is joint life insurance for couples. This type of policy covers two people and will usually pay out either on the first death, where the policy will end, or the second death, for the purposes of estate planning.

How do you take out a life insurance policy?

Once you decide you want life insurance, you will need to follow several steps to establish a policy.

Firstly, it is important to assess your needs to determine how much coverage you will need, based on regular outgoings and dependents. You should research different providers, or alternatively use a broker to find the most suitable policy for your needs and budget.

Next, securing a quote is key. Insurers are likely to ask for personal details including age, occupation, health and lifestyle to best determine the premium that needs to be paid.

When you have chosen a provider, you will need to complete an application which goes into more detail about personal and medical information. In some cases, policies require a medical examination.

Before the final commitment, check the details of the policy to ensure you are happy. There may be specific terms and conditions to adhere by, as well as exclusions from the policy.

To keep the policy active, you will need to pay monthly or annual premiums to the insurance company. As long as these are continually paid, a life insurance policy will remain in place.

How much does life insurance cost?

The average monthly life insurance premium in the UK was £27 across all age groups in 2025, according to the latest data from comparison website Confused.com.

However, the younger a person is when they buy a policy, the cheaper it tends to be. These lower prices are also locked in and only increase if you change the details of your policy later in life. The average monthly cost of a single life insurance policy for those aged 18-24 in 2025 was £12, making it the lowest price of any group.

This compares to £48 for people over the age of 55 – showing life insurance is usually cheaper the earlier you get it, though bear in mind you’ll be paying for it for longer if you continue to hold it, meaning, while you’ll be covered it the worst happens, you will pay more overall.

Annual premiums for younger age groups (18-24, 25-34 and 35-44) have dropped over the last five years, with cost reductions of -5%, -12% and -6% respectively.

But inflation and the high health risks of Covid-19 have had a negative impact on older generations, particularly those with more assets and greater family cover factored in – among 45–54-year-olds and people over 55 there has been 13% and 38% increases in policy costs since 2020, according to Confused.com.

Currently, men are paying more for life insurance than women, an average of £340 annually compared to £309 for women, due to factors such as potential differences in life expectancy and occupational risks.

Do you need life insurance?

Not everyone requires life insurance, but the policy could be worthwhile depending on your circumstances. For instance, life insurance can be important for homeowners with a mortgage, or those with a family.

"Without life insurance, the financial burden of a mortgage can fall entirely on your loved ones if you pass away," explains Babek Ismayil, founder and CEO of homebuying platform OneDome. "This could mean leaving your partner with the overwhelming responsibility of paying off a property they may not be able to afford on their own, risking the loss of the family home.

"Unfortunately, far too few people recognise the importance of life insurance in protecting their families and assets. This lack of awareness can have devastating consequences, leaving surviving partners struggling to maintain a secure and stable home environment."

Are life insurance policies worth it?

There are benefits and drawbacks to life insurance that change from person to person. You'll need to consider your situation to work out whether taking out a policy is worth it.

"The biggest advantage of life insurance is financial security and protection – knowing that you'll have things covered for your loved ones in case you're not here to look after them any longer. You're ensuring that your wishes are kept for you and your family," explains Ali Poulton, head financial coach at Octopus Money.

However, undoubtedly there is the factor of cost to bear in mind, and this will have to be weighed up against the benefits life insurance may provide.

"Cost can be a drawback. Depending on the level of cover, it can quickly add up to be expensive. It's also really confusing to know where to go and which companies to trust, especially in an insurance market that has a bad reputation for being hard to deal with. But with the right provider, the protection it offers can far outweigh the expense," Poulton adds.

Before you take out life insurance, also check what provision your employer makes for the event of your death.

Many companies offer their employees a "death-in-service benefit". This means that if you die while you work for them, they will pay your family a lump sum. Usually this is between double and quadruple your annual salary.

To get this payment, you don't have to die while you are at work; you just have to be employed by the company at the time of your death.

If your employer offers this benefit, you need to do the sums to see if the amount will provide sufficiently for your family, or whether you want to take out a life insurance policy on top of it.

Can life insurance premiums increase?

Whether life insurance premiums increase depends on a person's policy terms, as well as the type of policy that is taken out.

Those with a level term or whole-of-life policy who also have guaranteed premiums can be the most confident about their regular payments. Here, premiums remain fixed throughout the entire life insurance term. The only way payments would change would be if a person made changes to their policy.

Some life insurance policies have a reviewable term, or are whole-of-life with reviewable premiums. In this case, the insurer can increase premiums after a specific period of time, for example, every 10 years. Increases here will typically be related to a person's age, any changes in health risks, and inflation.

With life insurance policies that are linked to inflation, premiums may rise each year to make sure the payout a person receives is keeping pace with the cost of living. A commonly used measure is the Retail Price Index (RPI).

Finally, life insurance premiums can increase if a person wishes to make changes to the policy. By extending the life insurance term or increasing the coverage of the policy, a person may end up facing higher premiums. This is particularly true if a policyholder's health has deteriorated in the time since the original policy was established.

Are life insurance policies subject to inheritance tax?

A life insurance policy and its payout are considered part of the policyholder's estate. This means, it could be subject to inheritance tax, depending on the way the policy is structured. To avoid the life insurance payout being subject to inheritance tax it is vital to get it written in trust.

"If a policy is not written in a trust, then it automatically becomes part of the deceased's estate and the value of the policy is then counted towards the inheritance tax threshold," explains Rhys Jones, spokesperson for Go.Compare Life insurance.

Inheritance tax is charged at 40% above the tax-free threshold of £325,000. Some people may be able to increase their threshold. If the total estate including property, savings and other assets exceeds the threshold, then beneficiaries of the life insurance policy could receive less than they originally expected.

Most providers have an online trust section on the application so it’s an easy process and secures the money going to the right person(s).

Can I use life insurance to pay my inheritance tax bill?

Life insurance can be used to pay an inheritance tax bill – but only in a way that is really useful when the life insurance policy is structured correctly. If it’s not held in trust, the life insurance payout may be taxed for inheritance tax (at up to 40%) and, crucially, tied up in probate, defeating its purpose of giving your loved ones quick access to cash to pay immediate bills, including inheritance tax.

Financial advisers have told MoneyWeek they have seen a spike in enquiries about whole of life insurance – so-called ‘inheritance tax insurance’ – since Autumn Budget 2024, as a way to pay for an expected new wave of inheritance tax bills as pensions become subject to IHT from 2027 and business property relief and agricultural property relief have been slashed.

Using whole of life insurance (written in trust) to pay your loved ones’ inheritance tax bill works, but it doesn’t come cheap.

To take out a whole of life policy at age 60 to cover the cost of a £300,000 inheritance tax bill – the roughly projected average for London in the 2026/27 tax year – would cost a non-smoker around £1,000 a month, or £12,000 a year, according to CIExpert, an insurance specialist financial adviser.

Does life insurance cover funeral costs?

Standard life insurance policies are able to cover funeral costs if the payout is used for that purpose.

"But it's important to note that the money in this policy isn't dedicated specifically to pay for a funeral, and it can take some time for a payout to come through", says Jones.

Many people who take out life insurance may wish to establish a specific set of funds to cover their funeral.

For example, those who have taken out an over-50s plan typically do so with the intention of the payout being used for funeral costs. Regular payments made to an insurer means a lump sum will pay out when you die. But if an insurance plan is cancelled, the policyholder will not get their money back.

However, life insurance may not always be the best way to cover funeral costs, and some may wish to consider a pre-paid funeral plan rather than a policy, or a combination of the two, explains Jones.

"This standalone option can either be paid in advance or a person can set up monthly payments. Depending on the plan, you can either set this up just to cover the funeral director's costs, or the entire thing."