By clicking a retailer link you consent to third-party cookies that track your onward journey. This enables W? to receive an affiliate commission if you make a purchase, which supports our mission to be the UK's consumer champion.
Life insurance vs savings: are you better off building your own pot?
Matthew is an award-winning journalist, specialising in savings, tax and insurance.
Looking to buy life insurance?
Find the right life insurance policy using the service provided by LifeSearch.
Get a quoteWith the rising cost of living squeezing household budgets, life insurance premiums may feel like an easy expense to cut. But cancel your policy and you lose your cover – with no money back.
Savings rates are at a two-year high and, now that the £20,000 annual cash Isa allowance is staying, putting money aside for your loved ones instead might seem like a smarter option.
But can savings really replace life insurance? And what are the risks of relying on cash alone? We explore when each option might make sense.
Why take out life insurance?
Life insurance works by paying your loved ones a lump sum if you die while the policy is still active. There are two main types of cover to choose from:
- Whole-of-life cover pays out whenever you die, as long as you keep paying premiums. Some policies have a premium-paying term that ends at a set age, often around 90.
- Term insurance covers you for a set number of years and only pays out if you die during that period.
Payouts are tax-free and can be used for anything, but are often used to replace lost income or clear big debts like a mortgage.
They can also be written in trust, so your beneficiaries may receive the money faster without waiting for probate. The payout usually won’t form part of your estate for inheritance tax (IHT) purposes.
However, life insurance isn't for everyone, and there are a few downsides. For example, you might pay premiums for decades without receiving anything back if you outlive a term policy. Premiums can also rise if you take out a new policy later in life.
Age also matters when taking out a policy. The older you are, the higher the monthly premiums you're likely to pay. That's because younger people tend to be healthier, have fewer medical issues and are less likely to die during their term. Work, hobbies, family history and whether you're a smoker will all be assessed and will affect what you pay.
- Find out more: best life insurance providers 2026
Could savings do the same job?
A savings account can help build a nest egg that you can pass on to loved ones when you die. If nobody depends on your income or you already have sufficient financial protection, this might be a good alternative to life cover. Your cash will also earn interest, and you can currently find deals paying more than 5% AER.
Like other assets, money in savings accounts and cash Isas can be passed on to a spouse, civil partner or anybody named as a beneficiary once your estate has been administered. The executor of your will is responsible for closing accounts and distributing the funds.
The advantage of a savings account is that you can access your money during your lifetime if circumstances change. Plus, unlike taking out a term life insurance policy, there's no risk of paying premiums for years without receiving a payout.
However, it can take years to build up a meaningful sum, and your family will only receive what you've managed to build up so far. There's also a danger that you might be tempted to dip into that pot early.
Another thing to consider is whether your family will have to pay IHT. Savings, like other assets, count towards your estate, and a chunk could end up going to HMRC.
- Find out more: inheritance tax thresholds, rates and who pays
Life insurance vs savings: which is best for you?
The right choice depends on your financial commitments, how much you've already saved and who relies on you financially.
These two examples show how individual circumstances determine what product best suits your needs.
A 30-year-old working parent
Let's say you have two young children, a partner and a £100,000 outstanding mortgage. You also have a monthly income of £3,000, and £5,000 in existing savings.
Your first option is to take out £150,000 of level-term life insurance for 20 years. If you die before the policy ends and the claim is covered, your family gets the full £150,000 lump sum. This would help pay off the mortgage, with cash left over for childcare costs and household expenses.
But what if you decided to put money into a savings account instead?
Our analysis of level-term cover, based on quotes from five insurers for a 20-year policy with £150,000 of cover, found that the average monthly premium for a 30-year-old was £7.24.
Saving £7.24 a month for 20 years would give you just £1,738, before interest. Life insurance, however, could pay out £150,000 if you died during the policy term and your claim was accepted.
To save £150,000 over the same period, you'd need to put away £625 a month, assuming no interest and no withdrawals. For someone who needs to protect their loved ones financially, the monthly cost of life insurance could offer a much more affordable way to secure a financial safety net.
But there's a catch: level-term life insurance pays out only if you die within the policy term. If you survive the 20 years, you get nothing back. Savings, however, remain yours to access, and any money left can be passed on to your loved ones when you die.
Be aware: if you die early your family would receive only what you'd managed to save, rather than the £150,000 life insurance could provide.
- Find out more: do I need life insurance for a mortgage?
A 60-year-old with no mortgage
Now consider a 60-year-old whose children are financially independent, whose mortgage is paid off and who has no significant debts. They earn £3,000 a month and already have £10,000 in savings.
At 60, life insurance premiums are likely to be higher, particularly if you have any medical conditions. But with fewer financial commitments, you may not need such a large payout to help your loved ones cover the costs you leave behind.
On 12 November 2026, we got an online quote from Zurich for a 60-year-old non-smoker taking out a 20-year level-term policy with £30,000 of cover. This could provide money for funeral costs and other expenses. The monthly premium was £17.96, adding up to £4,310 over 20 years.
With £10,000 already saved, you'd need to put away just £83 a month to reach £30,000 over 20 years, and you'd earn interest on top. You'd also retain access to your money rather than risk paying premiums for a policy that expires without a payout.
For someone with fewer financial responsibilities and an existing savings pot, building up savings could therefore make more sense.
But remember, if you die before reaching your £30,000 savings target, your loved ones will inherit only what you've managed to put aside. Life insurance could pay out the full £30,000 from the start, provided the claim is covered.
As you can see, life insurance and savings accounts serve different purposes when building a financial safety net for loved ones.
Life insurance is generally better for people who want immediate financial protection, but a savings account could be enough for people who have already built a pot and have fewer financial commitments.
Nick Rixon, head of protection and expert advice at brokers LifeSearch, says using both products is sensible, and it shouldn't be a choice between one and the other.
He says: 'The risk of relying solely on savings is that you die before you’ve saved enough to cover the mortgage, bills and needs of people who depend on you.
'For many families, having both can make sense. And if monthly premiums are getting difficult, don’t just cancel and lose your cover. Review what you need and what you can afford, and explore whether adjusting the amount and type of cover could help.'
How to cut the cost of life cover
If the cost of monthly premiums is putting you off taking out a policy, there are several ways you can keep the price down:
- Cover only what you need You don’t have to match average cover levels. A lower payout can make premiums more affordable.
- Consider decreasing-term cover The payout falls over time, making it suitable for a repayment mortgage and often much cheaper than level-term cover.
- Choose a shorter term A 20-year policy will usually cost less than a 30-year one because you’re covered for less time.
- Shop around Premiums vary between insurers, so compare quotes to find the best price for your circumstances.
- Quit smoking Smokers can pay significantly more. Always be honest about your smoking status – otherwise, you risk invalidating your policy.
