Over-50s life insurance: how it works and the catches

Over-50s life insurance is whole of life cover sold to people aged 50 and over (MoneyHelper says usually 50 to 85). You aren't asked health questions and don't need a medical. You pay a fixed monthly premium, and when you die the plan pays a fixed cash sum to the people you choose. The FCA describes these as plans offering guaranteed acceptance for life cover to over-50s, which can be used towards funeral costs, paying debts or leaving money to someone.

The catch, in MoneyHelper's words, is that they are usually not considered good value. If you take one out in your 50s and live to 80 or beyond, you'll end up paying in much more than your family gets out. Full cover also usually starts only after the first year.

How over-50s plans work

MoneyHelper sets out the main features:

• Age. You must be over 50. The older you are, the more you pay for the same payout.
• Acceptance. No health questions or medical check. These are often marketed as "guaranteed acceptance" plans.
• Fixed premium. You pay the same monthly amount for life, or to the age set out in the policy. The insurer can't increase it.
• Fixed payout. You choose the payout when you buy, so you know exactly what it will be.
• Single life only. Unlike regular life insurance, you can't take one out as a joint policy.

The first-year waiting period

Because the insurer doesn't ask about your health, it protects itself with a waiting period. MoneyHelper lists being "fully covered after one year" as a feature, and its buying checklist says to check how long the waiting period is before the plan will pay out.

Read that part of the terms closely. It tells you what, if anything, is paid if death occurs during the waiting period, and the date full cover begins. MoneyHelper also suggests checking whether the policy covers death caused by drug or alcohol abuse.

The "pay in more than is paid out" risk

This is the main reason MoneyHelper is cautious about these plans. Three things work against value over a long life:

1. Premiums continue for many years. If you pay for life, or to a high age, the total keeps rising.
2. The payout doesn't grow. MoneyHelper notes it won't keep up with rising prices, so its real value shrinks every year.
3. Nothing comes back if you stop. You only get money back if someone claims after you die.

Illustration only: imagine a plan where each year's premiums add up to one-tenth of the payout. After ten years you have paid in as much as the plan will ever pay out. Every year after that, you're paying more than your family will get. Your own plan's figures will differ, so do the sum with your own premium and payout: divide the payout by your annual premium to see how many years it takes to break even.

MoneyHelper does say these plans might suit someone in poor health who doesn't expect to live long. If you already have one and have paid for a while, it can make sense to keep paying, but MoneyHelper suggests weighing how much longer you'd pay against what your beneficiaries would actually receive.

Over-50s plan or regular life insurance?

MoneyHelper notes that lots of health conditions are accepted by regular insurers, and that even with an existing condition a regular policy may be cheaper. Getting quotes for both before deciding is often worthwhile.

Over-50s plans are not funeral plans

The money from an over-50s plan goes to your beneficiaries to use however they wish. A pre-paid funeral plan is a different product that pays for the funeral itself. The FCA has warned that some over-50s promotions could mislead people into thinking they were buying cover for their funeral costs in full. Funeral plan providers must be FCA authorised, and the FCA's Firm Checker shows whether they are.

Other ways to help with funeral costs

MoneyHelper suggests looking at alternatives first:

• Saving regularly. If you can avoid touching it, you'll build up more than most over-50s plans provide.
• Existing money. Most banks release funds for funeral costs before probate is granted.
• Work benefits. Many employers offer death in service benefits, often three to four times salary. Trade unions and professional bodies sometimes offer death benefits too.
• Bereavement Support Payment. If you die before State Pension age, GOV.UK says a spouse or civil partner may get a one-off £2,500 and 18 monthly payments of £100, or £3,500 and 18 payments of £350 if they get Child Benefit for a child living with them. An unmarried partner you lived with can claim the higher rate only in that Child Benefit situation.

Tax and trusts

MoneyHelper says life insurance payouts are not taxed but may be added to your estate for Inheritance Tax. GOV.UK sets the rate at 40% above the £325,000 threshold. Many insurers let you put the plan in trust when you buy it. See life insurance in trust.

Cancelling and complaining

FCA rules give a 30-day cancellation period on a new life policy. Check your plan documents for the exact period that applies.

If something goes wrong, for example you weren't told about the waiting period or the insurer won't pay when it should, complain to the insurer first. If it doesn't resolve things within eight weeks, or you're unhappy with its final response, you can take the complaint to the Financial Ombudsman Service, normally within six months of that response. See declined life insurance claims.

What to check in your policy

• Waiting period: how long it lasts and exactly what is paid during it
• Exclusions: including deaths linked to drug or alcohol abuse
• Payout amount: and how much less it will be worth in 10 or 20 years' time
• Premium end age: whether you pay for life or to a set age, and what happens to cover after that
• Total cost: your annual premium compared with the payout, and the break-even year
• Missed payments: whether one missed payment ends the plan, and any grace period
• Trust or nominee: whether the plan names who receives the money
• Who knows about it: MoneyHelper suggests keeping paperwork safe and telling your next of kin

When to talk to a regulated adviser

A regulated financial adviser or specialist broker can compare an over-50s plan with regular life cover, savings and other options for your situation. MoneyHelper also offers free, impartial guidance.

This guide is general information about how insurance works in the UK. It isn't advice and doesn't take your circumstances into account. Policies differ: your own policy documents are what count.