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09-02-2021

Life Insurance pays a lump sum to your loved ones or chosen beneficiaries if you pass away while the policy is in force.

There are several different types of Life Insurance which can be used for different reasons and the type of cover you choose will have an impact on how much your Life Insurance premiums cost.

Common uses for Life Insurance include:

This guide aims to answer some of the most common questions our clients ask when considering Life Insurance, such as:

  • How much cover do I need?
  • How much does Life Insurance cost?
  • What’s the best way to compare policies and providers?

How Do I Calculate How Much Life Insurance I Need?

Before working out how much Life Insurance you need, you firstly need to understand the different types of policy available. Each one works slightly differently and is therefore suited to different needs. The main types of Life Insurance are:

  • Term Insurance
    Perhaps the most common form of Life Insurance, this lasts for a set period and then ends. Decreasing Term Life Insurance sees the payout decrease to zero by the end of the policy. With Level Term Life Insurance, the benefit is fixed, paying out exactly the same if you died in the first year as if you died in the final year.
  • Family Income Benefit
    Offers your loved ones a regular income if you pass away rather than a single lump sum, which can make their finances easier to manage after you’re gone.
  • Whole of Life Insurance
    Has no term and lasts for your whole life providing you keep paying premiums. As the payout is guaranteed (providing you maintain premiums), it’s usually the most expensive form of Life Insurance.

How Much Mortgage Life Insurance Do I Need?

To cover your mortgage, Mortgage Life Insurance is a form of Term Life Insurance which repays your debt if you pass away before you can pay it off. This lets your loved ones stay in the family home should the worst happen without having to worry about mortgage repayments.

Calculating how much Mortgage Life Insurance you need is fairly easy. You simply work out the balance of your mortgage and match your benefit to this.

What Type of Mortgage Do You Have?

The type of Life Insurance you need to protect your mortgage depends on the type of mortgage you have. There are two main types of mortgages:

  • Repayment mortgage
    The amount you owe falls as you make repayments that pay off both the outstanding capital balance and the interest you owe. Decreasing Term Life Insurance is well-suited to cover such a mortgage, as you can set the protection to reduce at the same rate as your mortgage balance.
  • Interest-only mortgage
    You repay only the interest and not the outstanding mortgage balance. The payout you need is therefore fixed, just like the capital balance of your mortgage. Level Term Insurance, where the benefit is the same for the term of the policy, is better for interest-only mortgages.

Life Insurance for Other Debts

As well as your mortgage, you might have other debts you want to repay after your death, for example bank loans or credit cards.

If you’re making regular repayments that are reducing the outstanding balance, then Decreasing Life Insurance is probably your best option as the payout will fall alongside the amount you owe.

If you’re not making regular repayments to reduce the debt, you may want to consider Level Life Insurance so there’s a consistent benefit to repay such debts.

Life Insurance and Funeral Costs

According to SunLife’s annual Cost of Dying Report, in 2020 the cost of an average funeral stands at £4,417.

This excludes ‘discretionary’ funeral spending, such as catering / venue hire for a wake, death and funeral notices, flowers, a headstone / memorial etc. Once you add these expenses of £2,306, the cost of the average funeral rises to more than £6,000.

Many people don’t have enough to pay such a bill, especially if the bulk of their estate is tied up in a home the family is still living in. Some people therefore include funeral costs in their Life Insurance calculation to ensure their family won’t have to worry about such expenses.

Whole of Life Insurance

Whole of Life Insurance guarantees a payout on your death, whenever that may be, rather than over a set term.

This does, however, make it an expensive form of Life Insurance because the insurer will definitely have to pay the benefit at some point as long as you keep paying premiums.

Clients therefore commonly use it to meet small expenses that are guaranteed after death, such as funeral costs.

Do You Want to Leave a Lump Sum or Income?

On top of repaying your mortgage / other debts and covering funeral expenses, you may also want to leave money so your family can maintain their standard of living.

If you want to leave a lump sum, you can do this with Level Life Insurance. This maintains a steady benefit throughout the policy, ensuring your family receives a lump sum even after clearing debts and paying for your funeral.

Alternatively, Family Income Benefit offers your loved ones an income for a set number of years rather than a lump sum. They can use this to keep up with mortgage repayments, cover school fees, meet other expenses and generally maintain their lifestyle.

If you choose Family Income Benefit, you’ll need to decide how much income your loved ones will receive each month, and over what period.

If you already know how much cover you need you can use our Life Insurance calculator to compare prices from Aviva, Legal & General, Vitality and other top UK insurers 😊

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How Much Does Life Insurance Cost?

Ultimately, this depends on you, your needs and your circumstances. Insurers calculate Life Insurance premiums based on various policy and personal factors.

Policy Factors

These are options you choose when you buy a policy. You can control most of these and can therefore use them to adjust premiums if necessary. They include your:

Level of Cover / Benefit

How much the insurer will pay out if you pass away. This is perhaps the biggest factor insurers use to calculate Life Insurance premiums — the larger your benefit, the higher your premiums.

Length of Cover

The number of years the policy runs for. The longer you run a policy for, the older you’ll be when the policy ends and the greater the risk of you passing away during the policy term. Policies with longer terms therefore cost more.

Level or Decreasing Cover

If you need Term Life Insurance, as discussed you can either have level or decreasing cover. This impacts your premiums.

  • Level Life Insurance
    As the benefit stays fixed over the life of the policy, the risk to the insurer is the same in each year the policy is live. Level Life Insurance is therefore the more expensive of the two types of Term Insurance.
  • Decreasing Life Insurance
    As the payout you’ll receive falls over time, reaching zero by the time the policy ends, the risk to the insurer declines over time. Premiums are therefore cheaper than for Level Life Insurance.

Personal Factors

Also affecting your premiums are various personal factors. These are specific to you and you can’t change most of them. They include your:

Age

The older you are, the greater the risk of you passing away and the higher your premiums will be.

Smoker Status

Smokers are more likely to die early than non-smokers and so therefore pay more in premiums.

Current State of Health

Insurers examine factors such as your height and weight, as well as any pre-existing medical conditions, when calculating Life Insurance premiums.

Level of Occupational Risk

Some jobs involve more risk than others. For example, scaffolders face greater risk on the job than an average desk worker due to working at heights. Those in riskier daily lives tend to pay more for cover.

Lifestyle / Hazardous Activities

Insurers ask about lifestyle factors, such as alcohol consumption, to calculate premiums.

They’ll also want to know if you regularly participate in hazardous activities (for example rock climbing or motocross racing). If this applies to you, it’s worth speaking to an adviser as it could impact your premiums depending on the nature of these activities and the frequency with which you do them.

Example Policy Premiums

In the table below, we’ve used our Life Insurance Calculator to work out some example monthly premiums. To do this, we’ve made a number of assumptions about the individual involved, assuming they are:

  • In good health
  • An office worker (an accountant)
  • Looking for £250,000 of cover over 20 years
  • Applying for cover for themselves only (i.e. not Joint Life Insurance with a partner).

Age

🚭
🚬

Decreasing Life Insurance

30 years old

£5.97

£9.92

40 years old

£10.31

£20.42

50 years old

£23.89

£58.64

Level Life Insurance

30 years old

£8.11

£12.20

40 years old

£13.87

£29.25

50 years old

£33.87

£83.59

Premiums represent the best rates available across the UK market and are correct as of February 2021

How Do I Compare Life Insurance Policies and Providers?

With Life Insurance, there aren’t as many options to choose from as there are with other protection policies. That can make distinguishing one provider from another more difficult as their offerings are fairly uniform.

However, some factors worth examining when you’re deciding between insurers include:

Online Trusts

If you need to write your Life Insurance policy into trust to protect the benefit from inheritance tax (ask your adviser if this applies to you), check which providers offer online trusts.

Online trusts let you complete all the paperwork online, including signing with an e-signature, rather than dealing with physical copies and wet signatures going back and forth in the post.

Included Terminal Illness Cover

Most providers include Terminal Illness Cover as standard for free. This triggers the payout early if a doctor diagnoses you with less than 12 months to live so you can be financially comfortable at a hugely difficult time. It is important to recognise terminal illness is not critical illness insurance and is only an accelerated death payment.

If you want to protect yourself against the risk of serious illness it is worth considering critical illness insurance or income protection.

Waiver of Premium

Some insurers include this for free, while for others it’s an optional extra for an additional premium. Here, the insurer steps in to pay your premiums if you’re ever off work sick and not earning so you can keep the policy running until you get back on your feet.

Funeral Pledge

Check whether your insurer has signed up the Protection Distribution Group’s Funeral Pledge. If it has, this means they’ve pledged to release at least £5,000 of your benefit to a funeral director to pay for your funeral if the rest of the payout is tied up in probate after your death.

Additional Benefits

One key way insurers distinguish themselves is in the additional benefits they offer (almost always for free) with their policies. Some of the best include:

  • Remote GP appointments via telephone or video call
  • Hospitalisation benefit, if you spend a set number of days as a hospital inpatient
  • Second medical opinion service, offering you an expert second opinion on a recent serious diagnosis or recommended course of treatment
  • Children’s death benefit, paying out a small lump sum if one of your dependent children sadly passes away while the policy is in force.

Who Are the Best UK Life Insurance Companies?

Our Life Insurance Cost Calculator lets you compare Life Insurance quotes from every major UK provider. Insurers we offer quotes from include:

Payout Rates

Most people understandably want to pick their Life Insurance based on the policy that’s most likely to pay out. After all, ensuring your loved ones are taken care of after your death is hugely important for many people.

However, it’s actually fairly difficult to distinguish one insurer from another in this area. Payout rates across the industry are not only higher than many people assume, but are also fairly uniform.

As you can see in the table below, most insurers paid more than 95% of all claims they received in 2019.

Insurer

2017

2018

2019

Vitality

99%

99.8%

99.5%

Scottish Widows

99%

99.3%

99.4%

Liverpool Victoria

95%

95%

99%

Zurich

99%

99.7%

99%

Aviva

98.9%

98.9%

98.6%

Legal & General

98%

97%

97%

Aegon

98%

98%

96%

Royal London

97.3%

95.2%

94.3%

AIG

99%

99%

n.a.

IMPORTANT NOTICE 🧐
You shouldn’t use payout statistics alone to decide which insurer offers the best Life Insurance. Instead, use them as a rough guide to compare successful claims across the industry as a whole.

Compare Life Insurance Quotes & Get Expert Advice

You can use the Life Insurance cost calculator on this page to work out how much your premiums will be given your needs and circumstances.

However, while the tools on this page help, identifying the best policies is only half the battle particularly if you have existing health conditions or are looking to include Critical Illness Cover.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

For help and fee-free advice, don’t hesitate to give us a call on 02084327333 or email help@drewberry.co.uk.

I’ve held a policy with Drewberry for several years now. They are always friendly, insightful and offer great service.

Dan Pettitt
13/01/2021
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