How does life insurance work, and which type do you need?

• Level term — pays a fixed lump sum if you die within the policy term. The cover and premiums stay the same throughout. Often used for family protection.
• Decreasing term — the payout reduces over time, broadly in line with a repayment mortgage balance, so premiums are lower than level term. Often used for mortgage protection.
• Family income benefit — pays a regular income, rather than a lump sum, for the rest of the policy term.
• Whole of life — covers you for your entire life and pays out whenever you die. More expensive, and often used for inheritance tax or funeral planning.
• Critical illness cover — pays a lump sum on diagnosis of specified serious conditions such as some cancers, heart attack and stroke. It can be bought alone or added to a life policy.

Start with what would need paying off or replacing: your mortgage and other debts, the income your household would lose, childcare and education costs, and funeral costs. Then subtract what's already in place — savings, any death-in-service benefit from your employer, and existing policies.

Rules of thumb based on a multiple of income are only a starting point. The right figure depends on your outgoings, your dependants and how long they would need support.

Premiums depend mainly on your age, health, smoking status, the amount of cover and the length of the term. Smokers typically pay much more; insurers usually treat you as a non-smoker once you've stopped for 12 months. Joint policies covering two people tend to cost less than two single policies, but pay out only once.

You must disclose pre-existing medical conditions accurately when you apply. Insurers may increase the premium, exclude a condition or occasionally decline, but failing to disclose relevant information could lead to a claim being refused.

Putting a life insurance policy in trust means the payout goes directly to the people you choose, usually without waiting for probate, and can keep it outside your estate for inheritance tax purposes. Most insurers provide trust forms free of charge.

MoneyHelper (moneyhelper.org.uk) offers free, impartial guidance on life insurance, and a regulated protection broker or independent financial advice firm can help you compare policies.