Benefits of life insurance

Life insurance helps turn “what if?” into a clear plan by providing a cash lump sum to the people you choose if you die during the policy term. Some policies also pay out if you’re diagnosed with a terminal illness as defined in the terms. Because it pays once and then ends, it offers focused financial support when it’s needed most.

Understanding the benefits can help you choose cover that fits your needs and budget. You decide how much protection you want and how long the policy should last, with different types of life insurance available. 

If life takes an unexpected turn, the payout gives those you care about practical support. Whether that’s covering the mortgage, everyday bills or other commitments, it can help protect the future you’re working toward. 

There are some main benefits to term life insurance, which may help put your mind more at ease about your loved ones’ financial future, if you die during the policy term. And, whoever you choose to receive the payout, they can use that sum as they wish. 

This means that term life insurance could help with: 

Living expenses

The lump sum payout may be used to help those you care about pay for everyday living expenses. This could be: 

• bills, like heating and electricity 
• everyday living costs, like grocery shopping and transport
• rent and council tax
• childcare or nursery fees
• school related costs, like uniforms, books, and clubs 
• short-term debts, like credit card debt or car loans 

For those who receive the payout, it could mean they’re able to focus less on money worries and more on coping with the loss of a loved one. 

Paying off the mortgage 

With decreasing term life insurance, the cover amount reduces in line with a repayment mortgage. If you die during the policy term (or meet the insurer’s definition of a terminal illness), it pays a single lump sum, which your loved ones can use to help clear the remaining mortgage.

Other types of term life insurance can also support mortgage needs because they provide a lump‑sum payout:

• Level term life insurance – The cover amount stays the same throughout the policy. A valid claim pays a fixed lump sum at any point in the term, and premiums stay the same unless you make changes. If the mortgage is the priority, the payout can help reduce or clear it.
• Increasing term life insurance – The cover is reviewed yearly and can rise to keep up with inflation, usually increasing your monthly payments. If you decline the rise, both cover and premiums stay the same until the next review. A valid claim pays the updated amount, which your family can use towards the mortgage.

Term life insurance (be that level, increasing or decreasing) lasts a specific length of time, or a term.

Typically, they can offer:

• flexibility for your needs – choose the term and the payout to match your goals, and pick from level (stays the same), decreasing (reduces broadly in line with a repayment mortgage), or increasing cover (can rise each year to help with rising costs).
• simple, focused protection – pays a single lump sum on a valid claim during the term, then the policy ends.
• predictability and practicality – premiums for level and decreasing cover are guaranteed to stay the same unless you make a change, and the payout can be used for real‑world needs like bills, rent, debts or funeral costs—whatever helps most at the time.

But it's important to note that, if you stop paying your premiums or cancel the policy, your cover will end and you won't get any money back. Also, term life insurance isn't a savings or investment product and will only pay out on a successful claim.

Inheritance tax (IHT)

If the payout is counted as part of your estate, inheritance tax (IHT) may apply. IHT is a tax on the value of what you leave behind when you die, above any allowances. One common way to plan for this is to place your life insurance policy in a suitable trust. Doing so can help keep the payout outside your estate, so the money can reach the people you choose quickly and in a more tax‑efficient way. It’s also wise to keep your will up to date and get independent financial advice, as everyone’s situation is different and tax rules can change.

Check out our article on life insurance and inheritance tax for more details.

Life insurance can be a big help, but it isn’t right for every need. Here are the main limitations to keep in mind:

1. Cover is time‑limited and pays once. Term life insurance only pays if you die (or meet the policy’s terminal illness definition) during the policy term. It won’t pay outside that term, and some events are excluded (for example, suicide in the first 12 months). After a successful claim, the policy ends.
2. It isn’t a savings or investment product and you must keep paying. If you stop paying premiums, your cover ends and you won’t be covered. With increasing cover, the price can go up over time; level and decreasing cover have guaranteed premiums unless you make a change. With our Life Insurance Plan, you can cancel within 30 days for a refund, but after that you won’t get premiums back.
3. Tax and rules depend on how your policy is set up (and on accurate information). Payouts are usually free from income tax and capital gains tax, but may be subject to inheritance tax if they’re paid into your estate rather than a trust. You also need to meet age and residency rules, and give complete, truthful answers. Otherwise, the insurer may change the terms, reduce a claim, or not pay.