Do You Actually Need Life Insurance?

Life insurance is one of those topics that sits in the “I know I should probably look into it” pile alongside writing a will and sorting your pension. Most people either avoid it entirely or end up massively overpaying because they walked into a bank and said yes to whatever was offered.

I am going to be honest with you: not everyone needs life insurance. If you are single, have no dependents, no mortgage, and nobody who relies on your income, you probably don’t need it. But if any of those things apply to you, especially if you have a partner and children, this is one of the most important financial decisions you will make.

Who needs life insurance?

The simplest test is this: if you died tomorrow, would someone you love be in financial trouble? If the answer is yes, you need life insurance.

Specifically, you should seriously consider it if:

You have a mortgage. Your partner or family needs somewhere to live. Life insurance can pay off the mortgage in full.
You have children. They need feeding, clothing, educating, and looking after for years. Childcare alone costs over £14,000 a year for a full-time nursery place in the UK.
Your partner relies on your income. Even if they work, losing your salary could mean they cannot cover the bills, the mortgage, or the lifestyle your family is used to.
You have debts. Any debts in your sole name die with you (they come out of your estate), but joint debts pass to the surviving borrower.

Who probably doesn’t need it?

There is no point paying for something you don’t need. You can probably skip life insurance if:

You have no dependents and no one relies on your income
Your mortgage is already paid off
You have enough savings and investments to cover your family’s needs (this is essentially what financial independence gives you)
You are already retired with a solid pension and no debts

I fall into this last category now. When I retired at 40, my mortgage was paid off and my investments generated enough income to support my family. I let my life insurance lapse because it was no longer necessary. But for the 15 years before that, while I had a mortgage and two young kids, I would not have been without it.

Term life insurance vs whole of life

There are two main types of life insurance in the UK, and they are very different products.

Term life insurance

This covers you for a set period: 10, 20, 25 years, whatever you choose. If you die during the term, the policy pays out. If you survive the term, nothing happens and the policy ends. It is straightforward and cheap.

A healthy 35-year-old non-smoker can get £250,000 of level term cover for 25 years for around £12 to £18 per month. That is the cost of a couple of pints each month to protect your family from financial disaster.

Whole of life insurance

This covers you for your entire life. It will always pay out, because you will eventually die. But because the payout is guaranteed, the premiums are much higher. A whole of life policy might cost 5 to 10 times more than an equivalent term policy.

For most people, term life insurance is the right choice. You need cover while your mortgage is outstanding and your children are young. Once the mortgage is paid off and the kids are financially independent, the need usually disappears.

Whole of life policies are mainly used for inheritance tax planning, which I will cover later.

How much cover do you need?

The standard rule of thumb is 10 times your annual salary. So if you earn £50,000, you would want £500,000 of cover. That sounds like a lot, but think about what it needs to do:

Pay off the mortgage (average UK mortgage is around £140,000)
Replace your income for several years
Cover childcare costs
Fund your children’s education
Give your partner breathing space to grieve and adjust

If you earn £50,000 and you have a £200,000 mortgage and two primary school age children, £500,000 is not excessive. It pays the mortgage and leaves £300,000, which invested conservatively could generate £12,000 to £15,000 a year in income for over 20 years.

Some people prefer to calculate it more precisely. Add up your mortgage balance, plus 5 to 10 years of household running costs, plus any major future expenses (university, for example). That gives you a more tailored figure.

Level vs decreasing term

With level term insurance, the payout stays the same throughout the policy. If you take out £300,000 of cover for 25 years, the payout is £300,000 whether you die in year 1 or year 24.

With decreasing term insurance, the payout reduces over time, roughly in line with a repayment mortgage. It is cheaper because the insurer’s liability shrinks each year.

Decreasing term makes sense if your only reason for insurance is to cover a repayment mortgage. As you pay off the mortgage, the amount you need covered goes down.

Level term makes sense if you want to protect your family’s income as well as the mortgage. Your salary does not decrease over time, so your cover shouldn’t either.

I always had level term. The extra cost was minimal (maybe £5 a month more), and it meant my family was fully covered regardless of when anything happened.

The trust trick: avoiding inheritance tax

This is something a surprising number of people don’t know. If your life insurance pays out on your death and it is not written in trust, the payout gets added to your estate. If your estate is worth more than £325,000 (or £500,000 if you are leaving your main residence to your children), your family could end up paying 40% inheritance tax on the insurance money that was supposed to protect them.

The solution is simple: write your life insurance policy in trust.

A trust means the policy is held separately from your estate. When you die, the payout goes directly to your beneficiaries (your partner, your children) without going through probate and without being counted towards inheritance tax.

Most insurance companies offer this for free when you set up the policy. It literally takes five minutes. There is no ongoing cost. It is one of the easiest and most effective bits of tax planning you can do, and most people either don’t know about it or forget to do it.

If you already have a life insurance policy and it is not in trust, contact your provider. You can usually set up a trust at any point during the policy.

How to get the best deal

Life insurance pricing varies wildly between providers. The same person can be quoted £12 a month from one company and £25 a month from another for identical cover. Always compare.

Use a comparison site like MoneySuperMarket or CompareTheMarket to get initial quotes. Then consider speaking to an independent broker, particularly if you have any health conditions, because some insurers are more lenient than others on specific conditions.

A few things that affect your premium:

Age. Younger is cheaper. Every year you delay costs more.
Smoking. Smokers pay roughly double. If you vape, some insurers treat you as a smoker, others don’t.
Health conditions. Anything from high blood pressure to mental health history can affect your premium.
Occupation. Desk jobs are cheaper than construction work.
Amount and term. More cover and longer terms cost more.

The single best thing you can do is get it sorted while you are young and healthy. A policy taken out at 30 is dramatically cheaper than one taken out at 45.

My honest take

Life insurance is not exciting. Nobody is going to congratulate you for setting it up. But if you have a mortgage, a partner, or children, it is one of the most responsible things you can do with £15 a month.

I had mine in place for 15 years. I never needed it. And that is exactly how insurance should work. You pay a small amount regularly so that if the worst happens, the people you love are not left scrambling to pay the mortgage or wondering how they will afford to keep the house.

Get a quote this week. Write it in trust. Then forget about it and get on with building your wealth.