What is family life insurance and why might your family need it?
Find out how you can protect your family with family life insurance.
What is family life insurance?
Family life insurance is a way to provide financial protection for your family if you die, subject to meeting policy terms. It pays out a lump sum to your loved ones if you pass away while the plan is in place. There’s not a specific policy called ‘family life insurance’. But many families in the UK use our life insurance to provide a financial safety net for their spouse or partner, and children.
The payout can be used for anything from paying off a mortgage to covering everyday bills and future education costs. Knowing your family will have access to this money if anything happens to you can be hugely reassuring. Nearly £22 million a day was paid out in life claims during 2024, helping tens of thousands of families deal with the consequences of unexpected loss1. Claims are subject to policy terms, conditions and exclusions.
What does a family life insurance policy typically cover?
Family life insurance provides a lump sum to your loved ones – your beneficiaries, when you pass away or if you’re diagnosed with a terminal illness, subject to policy terms and conditions. When you set up family life insurance, you can choose who should receive the money. You can make your spouse, partner and children your beneficiaries.
Life insurance payouts are not usually subject to income or capital gains tax. However, they may be subject to inheritance tax depending on your circumstances and current legislation. Tax rules can change and their impact depends on your individual situation. Consider seeking independent financial advice. It can be used to pay for things like:
- Funeral costs
- Mortgage and rent payments
- Household bills
- Loans and credit card payments
- Childcare, school and university fees
- Holidays
- Inheritance tax planning
Life insurance can be an important financial lifeline for your loved ones. It’s particularly important if you have debts, earn more than your partner, are self-employed or a sole parent.
What types of family life insurance policies should you consider?
There are two main types of life insurance in the UK that are suitable for families, term life insurance and whole of life insurance.
Term life insurance covers you for a certain amount of time. This is the ‘term’. Many people take out term insurance to cover the time they’re paying back a mortgage, or when their children are still dependant on them. So, this insurance can be in place for many years. If you die after the term has expired, then your beneficiaries won’t receive anything.
Whole of life insurance stays in place for your whole life and pays out whenever you die. A payout is usually expected, as long as you keep paying your premiums and all policy terms are met.
You can take out life insurance as a single person or a couple. Joint life insurance covers two people on the same policy. If you or the other person named on the policy dies whilst the policy is in place, the surviving person will automatically get the payout. The policy then ends, so the surviving partner is no longer covered by the insurance.
There’s no need to be married or in a civil partnership to get joint life insurance. If you share financial responsibilities with your unmarried partner, you can still get joint life insurance.
Some providers, like Vitality, also allow you to add your children to your life insurance policy. If your child is diagnosed with a serious illness, suffers a serious accident or dies, you may receive a payout, provided you meet the policy’s terms and eligibility criteria. It can help with their rehabilitation, replace lost income if you need to take time off work or be used to cover funeral costs.
How does term life insurance work for families?
Term life insurance pays out if you die while the policy is in place. It doesn't matter if you die from natural causes, like an illness, or as a result of an accident. As long as the cause of death is covered by your policy, your family will receive a payout.
Term life insurance can also adapt as your family life changes. You can often increase your cover when a child arrives, as it allows you to make changes for major life events such as birth or adoption.
Many policies also include terminal illness cover. This means they’ll pay out early if the policyholder is diagnosed with a terminal illness and expected to die within 12 months. The early payout can help towards maintaining family life when you’re no longer able to work.
For example, based on a representative scenario, a non-smoking 35-year-old may be able to obtain £100,000 of life insurance cover with Vitality, that increases each year, for 20 years, with premiums starting from around £5 per month. Actual premiums vary depending on individual circumstances, policy features, and underwriting.
When is whole of life insurance a better fit for family protection?
With a whole of life policy, you’re protecting your family right up until the day you die, whenever that may be. The lump sum they receive could be used to pay for bills, everyday living, school fees or even funeral expenses. Knowing that your family will receive a payout, granted you meet the terms of your policy, can offer reassurance.
Even when your children have grown up, you may still want to leave them some money for their future or your future grandchildren. As we get older, we may need to start paying for elder support which eats into our savings. A whole of life policy is designed to provide a payout when you die, meaning that you're guaranteed to leave behind some money for your loved ones, provided all premiums and policy terms are met.
Any payments to your loved ones from a life insurance policy are not usually subject to income or capital gains tax. However, unless the policy is written in trust, the payout will normally form part of your estate and may be liable for inheritance tax (IHT) at the prevailing rate (currently 40%). Tax rules can change and their impact depends on your individual circumstances. Consider seeking independent financial advice.
If you think you’ll need to pay inheritance tax on your estate when you die, you can take out a whole of life insurance policy in trust to cover the tax bill. The policy sits outside of your estate, so is not subject to probate and can be paid quickly.
Life insurance for young families
Starting a family is a very exciting time. If you’ve recently started a family, or a little one is on the way, now is a good time to think about how you can protect your family.
Raising a family can be expensive. Children come with plenty of extra costs that you may never have thought about before. A family life insurance policy means that your family can continue to afford those things if anything happened to you.
Here are three of the most popular kinds of life insurance for young families:
- Decreasing term insurance. The insurance payout decreases over time. This can be used to cover a repayment mortgage or other debts that reduce over time, such as car loans.
- Level term insurance. Pays out the same amount for the duration of the plan. Useful if you have an interest only mortgage. Or if you want to provide cover for day-to-day family costs.
- Increasing term insurance. With this insurance the cover amount rises each year in line with inflation. Can be very useful for covering childcare and education fees or even rental costs that rise each year.
You can find out more about decreasing and term life insurance in our helpful guide.
How much life insurance cover does each family member need?
Everyone’s needs are different, but when you’re working out how much cover your family may need, look at both your expenses and revenue.
Expenses
| Type | Examples | Action |
|---|---|---|
| Outstanding debts | • Mortgage • Personal loans • Car loans • Credit cards |
Add up the total. |
| Living expenses | • Childcare • Domestic bills • Food and travel • Entertainment and holidays |
Multiply the annual cost by how long your dependants will need financial support for. |
| Children’s future expenses | • Private schooling • University • First car • House deposit |
Include an allowance if required. |
| Funeral costs | • The overall cost of dying can reach nearly £10,000². | Include an allowance if required. |
Revenue
| Type | Examples | Action |
|---|---|---|
| Existing savings and investments | • Savings accounts • ISAs • Premium Bonds • Shares |
Add up the total. |
| Partner’s income | • Paid income • Property income • Pension income |
Add up the annual total. |
| Death in service payment | • Employer • Other life insurances |
Add up the total. |
Add together all the costs above and subtract any family savings, income and existing cover. This should leave you with the amount of life cover you need. Get a quote.
If you’re not looking for a precise figure, you could choose a multiple of your salary as cover. Death in service payments are often based on four times your current salary.
When should you review or update your family life insurance?
Reviewing your life cover regularly means that it will still meet your needs if or when it’s required. Take an annual look at your expenses vs revenue to see if things have changed over the year. If they have, you can sometimes make changes to the amount of cover or type of cover you have.
Most UK life insurance companies allow you to make changes to your cover when a significant life event happens. Such as:
• The birth or adoption of a child
• Marriage
• Moving home
• Increasing your mortgage
• A change to your income or job
• Divorce
What factors affect the cost of family life insurance?
The cost of your life insurance will depend on:
• your age
• your chosen payout
• how long you want the policy in place
• whether or not you’ve ever smoked
• your health and lifestyle
Does your family medical history affect life insurance eligibility and cost?
Yes, it can do. When you complete your application form you will be asked questions about your medical history, including whether there’s a family history of any serious medical condition. If there is, the insurer will want to know whether any immediate family members, such as parents or siblings, are affected, what the condition is, and at what age they were diagnosed.
If your family history suggests a higher likelihood of you developing that serious medical condition, the insurer may increase your premium. But it’s unlikely to stop you from getting cover.
What should be avoided when choosing life insurance?
When choosing life insurance there are a few things to avoid.
Underinsurance
Make sure you leave enough of a lump sum to cover expenses now and in the future. Increasing term insurance can help keep pace with costs over time.
If you take out decreasing life insurance to cover a repayment mortgage, make sure that the payout decreases at roughly the same rate as you pay back your mortgage. If there’s a shortfall, your family may struggle to repay it. Review your cover regularly so that you stay well insured.
Short-term cover
If your insurance is to protect your family until they can fend for themselves, then ideally, it needs to stay in place until your youngest child has finished further education.
Inheritance tax trap
If you plan to use your life insurance to pay off an inheritance tax bill, or you think you may be liable to inheritance tax after your death, you may wish to set up your policy in trust. Setting up a trust is a legal process and may require legal or financial advice.
Not shopping around
Not all life cover is the same. Get quotes from several different providers and read the small print before you agree to cover.
Key takeaways
Key takeaways
- Family life insurance is a way to provide financial protection for your family if you die. It pays out a lump sum to your loved ones if you pass away while the plan is in place.
- The payout can be used for anything from paying off a mortgage to covering everyday bills and future education costs.
- When you set up family life insurance, you can choose who should receive the money. You can make your spouse, partner and children your beneficiaries.
- Remember to review your life cover regularly so it still meets your needs as your family grows.
