Get the right type of life insurance

07 December 2010

Get the peace of mind that comes with buying the right life insurance policy at the right price.

Decide whether you really need life insurance

Do you need life insurance?
The answer to this question depends, ironically, on whether anyone depends on you.

For example, if you have children, then yes, you probably do need life insurance – because they depend on you financially. This is the case even if you don’t work and instead are the unpaid nanny/cleaner/chauffeur/cook/secretary/superhero of the household. If you want to protect your contribution to your family’s finances in the event of your death, you need life insurance.

And children aren’t the only dependents you need to think about. If you don’t have children, but you do have a joint mortgage, and your partner could not meet the monthly payments on his/her salary alone, then life insurance is probably a good idea. Otherwise your beloved could be turfed out by the mortgage lender after your death and – if the property is worth less than the mortgage – pursued for the rest of the debt. Not a pleasant thought.

Similarly, if you support or look after someone financially in any way, be it a friend or relative, then you should consider taking out life insurance to protect them should the worst happen to you.

Compare life insurance policies using the lovemoney.com life insurance service

Decide which type of policy you need

There are several different types of life insurance policies, so it's really important you pick the right policy for your needs. Here are the three main types:

Level term assurance
This type of insurance provides you with a cash lump sum if a claim is made within the set period of time you choose (the term).

So, let's say your mortgage is £150,000, which you'll repay over a term of 25 years. In this case, you might choose a 25-year level term assurance policy with a sum assured of £150,000. This means you'll receive £150,000 as a cash lump sum, should you need to claim on the policy at any point over the next 25 years.

Decreasing term assurance
If you want to keep the cost of life cover down, you could go for a decreasing term assurance policy instead. A decreasing policy is specifically designed to provide cover for a debt which reduces in size over time, such as a repayment mortgage.

A decreasing term assurance plan will always pay out just enough cash to cover the outstanding mortgage at the point a claim is made.

This is how it differs from a level policy. Remember, with a level policy, your cover stays the level throughout the term, even though your debt is decreasing. So a level policy could provide a surplus amount above and beyond the mortgage debt. This is why a level policy is more expensive than a decreasing policy. 

Family income benefit
This type of policy pays out an income from the time a claim is made until the end of the policy term.

So how does family income benefit work?  Let's say you want to provide your family with a yearly income of £20,000 for the next 20 years. This means when the policy starts, you'll need to insure yourself for £400,000.

That sounds like a lot, but if a claim was made in the first year, the £400,000 worth of cover will be used to pay out £20,000 a year to your family for the next 20 years. 

For each year where there is no claim, the cover reduces by £20,000. So that means if a claim was made after 14 years, the total amount of cover would drop to £120,000 – £20,000 paid out every year for the remaining six years of the policy.

In terms of costs, family income benefit should work out cheaper than the level policy mentioned earlier, because the cover reduces over time (whereas with a level plan the amount of cover always stays the same).

Compare life insurance policies using the lovemoney.com life insurance service

Decide how much cover you need and for how long

Ask yourself: are there people in your life who depend on you financially? If there are, then life insurance is an absolute must. And it’s just as important that you get the right amount of cover too. This is not a decision to be taken lightly, so how do you do it?

People often make the mistake of only buying enough life insurance to pay off their mortgage. However, you need to think about how much it would cost to replace your salary and provide for your family if you were no longer around. You should always have enough cover in place to clear your mortgage in the event of death. But you also need some extra cover to pay for everyday living expenses so your family can maintain their lifestyle.

Take a look at this cover calculator to help you work out how much life insurance you really need.

You should also think about how long life insurance should be in place. Typically people buy policies which last until they retire or until their youngest child is financially independent. But you should consider any other factors, for example if one of your children cares for you, should you take out a life insurance policy for them too?

But it's also important you don't have too much life insurance. Over-insuring yourself is a waste of money. By taking some time to calculate how much cover you need more accurately, you should avoid this problem.

Compare life insurance policies using the lovemoney.com life insurance service

Choose a cheaper policy

You should never pay over the odds for your life insurance policy.

Shop around for a new policy
Obviously, you'll want to find the most competitively-priced policy and that means shopping around.

Our life insurance service can help. It provides quotes from a wide range of the UK's biggest insurance brands, and – just as you would expect from lovemoney.com – an average of 30% of the commission earned will be re-invested to provide you with discounted premiums.

In fact, if you're able to find a cheaper policy anywhere else, your best quote will be matched to the penny.

Best of all, you can get a quote in less time than it takes to make a cup of tea. And as long as you don't suffer from any pre-existing medical conditions, and you don't have a hazardous occupation or pastime, you should be instantly accepted for cover.

Switch policies
You'll also have the opportunity to compare any current policies you have with other plans that are available on the market now. This should help you decide whether to switch if a better value policy can be found saving you money off your premiums.

However, if you're significantly older or your health has deteriorated, you could find a new policy is more expensive than your existing plan, so you may be better off sticking where you are.

Beware of joint life insurance policies
One of the most common mistakes which people make when buying life insurance is to buy a single policy to cover two or more people, known as a "joint life, first death" policy. For example, when buying life insurance to pay off your mortgage debt if one of you dies, you would normally buy a policy of this kind.

However, it makes far more sense to pay a few extra pounds each month and buy two individual policies with two separate payouts. Not only does this potentially double your cover, but it also stops the surviving partner from being uninsured. In addition, it makes things easier to unravel if you later separate, because joint policies aren't easily divided in two!

Compare life insurance policies using the lovemoney.com life insurance service

Think about insuring against health

If you're unable to work due to an illness or an accident, paying your mortgage and household bills could get tough.

There are two types of insurance policy that could help you with this problem: critical illness cover (CIC) and income protection insurance (IPI) – formerly known as Permanent Health Insurance (PHI).

Consider critical illness cover
CIC usually provides a one-off tax-free payment if you're diagnosed with an illness or condition which is specifically covered by the policy. You can only claim within the term you have chosen. The lump sum can be used as you wish. You could use it to cover everyday expenses, fund private treatment or provide an income.

CIC policies vary from one company to another. Some may cover more illnesses than others so it's very important that you read the terms and conditions before you sign up.

Income protection insurance
IPI works very differently to CIC. As the name suggests, it's designed to replace your income if you're unable to work as a result of any illness or accident. IPI pays out a monthly, tax-free payment until you can return to work or you retire.

Most IPI policies will provide around half to two-thirds of your gross salary as a maximum benefit. But since you receive this amount tax-free, the payout shouldn't be far off your normal take home pay.

Again the cover provided by IPI varies from company to company so be prepared to wade through the terms and conditions and look out for any exclusions or restrictions.

The premium you pay for an IPI policy will be influenced by numerous factors including the ‘deferment period', which can have a huge impact on cost. This means the longer you're able to defer taking benefits the lower your premiums will be. The payout can usually be deferred for one day or by one, four, eight, 13, 26 or 52 weeks. You decide how long you can wait depending on other cash reserves you may have or benefits you might be entitled to from your employer, for example.

Think about insuring your life AND your health
If you have financial dependants you should think about insuring both your life and your health. You can get quotes for life insurance and CIC combined into one policy which may work out cheaper than buying to separate policies for each. You can compare quotes for life cover and CIC using the lovemoney.com life insurance service.

Having said that, if you buy a combined policy a claim can only be made once – either on diagnosis of a critical illness or on death, but not both. In this way, the policy will only pay out once. However, if you buy life cover and CIC separately, you could potentially claim twice – once for illness and once for death – which effectively provides double the cover.

You should compare the costs of combined and separate policies. You may find two separate plans are only a little more expensive, but provide a lot more cover.

Compare life insurance policies using the lovemoney.com life insurance service

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