Life Insurance Calculator

Q: What types of life insurance are available in the UK?

Four main types: Decreasing term (cover reduces over time, cheapest, matches repayment mortgage), Level term (fixed lump sum, good for income replacement), Family income benefit (regular monthly income to family, often most affordable), and Whole-of-life (guaranteed payout, used for IHT planning, highest premiums). Most advisers recommend combining decreasing term for the mortgage with level term or family income benefit for income replacement.

Q: Is the life insurance payout taxed?

Life insurance payouts are tax-free in the UK. The beneficiary does not pay income tax or capital gains tax. However, if the policy is not written in trust, the payout becomes part of your estate and may be subject to inheritance tax (40% above the nil-rate band). Writing the policy in trust ensures the payout bypasses the estate entirely.

Q: Should I write my life insurance policy in trust?

In most cases, yes. Writing a policy in trust means: the payout goes directly to beneficiaries without probate (faster payment), it does not form part of your estate (avoids IHT), and you control who receives the money. Most insurers provide free trust forms. The main exception is if the payout is intended for your estate, e.g., to pay an IHT bill.

Q: What is the difference between level term and decreasing term?

Level term pays a fixed lump sum regardless of when you die during the term — the payout is the same in year 1 or year 24. More expensive but best for income replacement. Decreasing term starts at the full amount and reduces over time, matching a repayment mortgage. Cheaper because the insurer's liability decreases. Not suitable for interest-only mortgages where the balance stays the same.

Calculate how much life insurance cover your family needs. Factor in your mortgage, income replacement, children's costs, and existing provision. Compare policy types and plan for inheritance tax.

Calculate how much life insurance cover your family needs

Outstanding mortgage

Remaining mortgage balance

Annual income

Your gross annual salary

Years of income replacement

years

How long your family would need income support

Number of children

Age of youngest child

years

Used to calculate years until independence (age 18)

Funeral costs

Average UK funeral: ~£4,000-£5,000

Other debts

Car finance, credit cards, loans

Existing life cover

Death-in-service benefit, existing policies

Savings & investments

Accessible savings that could support your family

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This calculator provides guidance only, not financial advice. Life insurance is a regulated product. Consult an independent financial adviser.

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How to Use This Calculator

How Much Cover? tab

Enter your outstanding mortgage, annual income, number of years your family would need income support, number of children, and the age of your youngest child. The calculator adds up your total financial obligations — mortgage, income replacement, childcare costs, funeral, and debts — then subtracts any existing life cover and savings to show your recommended cover amount. Expand "More options" to adjust existing cover and savings.

Which Type? tab

Enter your mortgage balance and income replacement need to see which policy type suits each. The calculator compares decreasing term (cheapest, cover reduces like a mortgage), level term (fixed lump sum), and family income benefit (monthly payout). No price quotes — just guidance on which type fits your situation.

IHT Cover tab

Enter your total estate value to estimate your inheritance tax liability and how much whole-of-life cover you may need to offset it. The calculator uses the nil-rate band (£325,000) and residence nil-rate band (£175,000) to estimate IHT. For a detailed calculation, use our Inheritance Tax Calculator.

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The Formula

Life insurance needs are calculated by totalling your financial obligations and subtracting existing provision:

Total Need = Mortgage + Income Replacement + Children's Costs + Funeral + Other Debts

Income Replacement = Annual Income × Years of Support
Children's Costs = £8,000/year × Children × Years to Independence (age 18)

Existing Provision = Current Life Cover + Savings

Recommended Cover = Total Need − Existing Provision

IHT Liability = (Estate Value − Nil-Rate Band − RNRB) × 40%

The biggest single factor is usually the mortgage. Income replacement is the second-largest component — multiply your annual salary by the number of years your family would need support. Children's costs cover childcare and education until they become independent at 18.

Always subtract existing provision: workplace death-in-service benefits (typically 2-4x salary), any current policies, and accessible savings. The result is your insurance gap — the amount of new cover needed.

Example

James & Sarah — Mortgage, Two Children, One Income

James earns £45,000 and is the primary earner. Sarah works part-time. They have a £250,000 mortgage and two children aged 3 and 6. James has a £100,000 death-in-service benefit through work and £20,000 in savings.

How Much Cover? tab

Outstanding mortgage£250,000

Annual income£45,000

Years of income replacement15 years

Number of children2

Age of youngest child3

Mortgage£250,000

Income replacement (£45,000 × 15)£675,000

Children's costs (£8,000 × 15 yrs × 2)£240,000

Funeral costs£5,000

Total need£1,170,000

Existing cover (death-in-service)£100,000

Savings£20,000

Recommended cover£1,050,000

James's adviser recommends splitting this into two policies: a decreasing term policy for the £250,000 mortgage (cheapest option, cover reduces as the mortgage is repaid) and a level term policy for £800,000 to cover income replacement and children's costs.

Which Type? tab

Decreasing term (mortgage)£250,000

Level term (income + children)£800,000

Alternative: Family income benefit~£4,444/month

The family income benefit alternative would pay Sarah approximately £4,444 per month until the policy ends — mimicking James's salary and making budgeting easier.

FAQ

How much life insurance do I need? ▼

The amount depends on your financial obligations: outstanding mortgage, how many years your family would need income support, number and ages of children, funeral costs, and other debts. A common approach is to add up all these needs, then subtract existing provision (workplace death-in-service benefits, current policies, savings). The shortfall is your recommended cover. For most UK families, this ranges from £200,000 to £1,000,000+. Use our calculator above for a personalised figure.

What types of life insurance are available in the UK? ▼

There are four main types: Decreasing term — cover reduces over time, matching a repayment mortgage. Cheapest option. Level term — fixed lump sum paid out at any point during the term. Good for income replacement. Family income benefit — pays a regular monthly income to your family until the policy ends. Often the most affordable for the same level of protection. Whole-of-life — guaranteed payout whenever you die, but premiums are significantly higher. Used mainly for inheritance tax planning. Most advisers recommend combining decreasing term (for mortgage) with level term or family income benefit (for income replacement).

Is the life insurance payout taxed? ▼

No — life insurance payouts are tax-free in the UK. The beneficiary does not pay income tax or capital gains tax on the payout. However, if the policy is not written in trust, the payout becomes part of your estate and may be subject to inheritance tax (IHT) if the estate exceeds the nil-rate band (£325,000 + £175,000 RNRB if applicable). Writing the policy in trust ensures the payout goes directly to beneficiaries without entering the estate, avoiding IHT entirely. Most advisers recommend writing all life policies in trust.

Should I write my life insurance policy in trust? ▼

In most cases, yes. Writing a policy in trust has three key benefits: (1) the payout goes directly to your named beneficiaries without going through probate, meaning they receive the money faster; (2) the payout does not form part of your estate, so it is not subject to inheritance tax; (3) you maintain control over who receives the money. Most insurers provide free trust forms when you take out a policy. There are different trust types (absolute, flexible, discretionary) — a financial adviser can help you choose the right one. The main situation where trust may not be needed is if the payout is intended for your estate (e.g., to pay IHT).

What is the difference between level term and decreasing term? ▼

Level term pays a fixed lump sum regardless of when during the term you die. If you take out £500,000 of cover for 25 years, the payout is £500,000 whether you die in year 1 or year 24. It is more expensive because the insurer's risk stays the same throughout. Best for income replacement and general family protection. Decreasing term starts at the full amount and reduces over time, typically matching a repayment mortgage balance. It is cheaper because the insurer's maximum liability decreases each year. Best for mortgage protection. Important: decreasing term is not suitable for interest-only mortgages, where the balance stays the same.

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