Life insurance, also known as life assurance
or term assurance can be confusing and complicated, which is why we've put together 10 top money saving tips to help you find the right life insurance policy for your needs and save money in the process.
If you were to die, taking out life insurance can help make sure that your family can cope with any financial burden you might leave behind such as replacing your income, paying the rest of the mortgage, paying for childcare, etc.
- Whole of life insurance. Whole life insurance is designed to provide cover for the policyholder's life and pay out a lump sum whenever you die. With whole life insurance your beneficiaries are guaranteed a cash sum when you die. Whole life insurance is generally more expensive because the insurer will definitely need to pay a cash sum when you die and premiums normally need to be paid up to a certain age e.g. 70 years. Term assurance tends to be cheaper as it provides life insurance cover for a fixed term only. Depending on the type of policy taken there may be a cash-in value of the policy if it is stopped for any reason.
- Level term life insurance. This type of term assurance pays out a fixed lump sum if the policyholder dies during the policy's term, but doesn't pay out if you die after the term has ended. The amount is guaranteed and doesn't change during the term of the policy. This type of life insurance policy is typically used by people with an interest-only mortgage, where the amount owed on the mortgage remains unchanged throughout the term.
- Decreasing term insurance. This type of term assurance pays out a lump sum if the policyholder dies during the policy term. The actual lump sum decreases during the lifetime of the policy and with term assurance there is no cash-in value at any time. This type of life insurance policy is typically used by people with a repayment mortgage where the outstanding mortgage balance reduces during the life of the mortgage. It's cheaper to take out decreasing term life insurance if you have a repayment mortgage as you're only paying for life insurance cover you actually need to pay off the mortgage.
- Single or joint life insurance? Life insurance policies can cover a single life or be on a joint life basis. Single life policies can be cheaper, however, you need to consider your individual needs, for example joint life cover is important if you need to cover both you and your partner's income or pay for child care in the event your non-working partner dies. Even if a joint policy does look suitable, it's worth getting quotes for standalone policies anyway, as it might be cheaper and you will get two pots of cover.
- Critical illness. Critical illness cover is an additional benefit that can be added to your life insurance policy. A lump sum is paid on the conclusive diagnosis of a critical illness such as cancer, a heart attack, multiple sclerosis or a stroke. Adding critical illness cover to your life insurance policy will cost you more; however, you need to weigh up the extra cost against the benefit of getting a lump sum payment in the event you or your partner is unable to work. You can also save money by combining your life insurance and critical illness rather than taking out separate policies. It's important to check the level of critical illness cover, as most critical illness policies only cover a limited range of cancers, not all. The FSA's Money Made Clear website has a good section about critical illness.
- Go smoke free. Your life insurance will be cheaper if you don't smoke. A non-smoker is usually defined as someone who hasn't smoked cigarettes in the last 12-months. The NHS Smoke Free website contains detailed information about the free NHS support services to help you quit smoking. Insurers may also increase premiums if you are using nicotine replacement products such as patches.
- How much cover do you need? Ideally the amount of life insurance cover you need should cover any outstanding debts (mortgage repayments, outstanding loans, credit cards, etc) and provide your family with a reasonable level of income. As a general rule of thumb the amount of life insurance cover should be 10 times the highest earner's income. One way to save money is to check to see if your employer offers you 'death in service' benefits (typically 4 times salary) and deduct this amount from the amount of life insurance cover you need.
- It is also worth checking if you already have some life insurance with savings or investments plans you hold (i.e. an endowment usually has some kind of cover attached). These can be deducted from the total amount of life cover required.
- Life policy in trust. If you die the life assurance forms part of your estate, meaning your estate could be liable for inheritance tax. You can avoid this by writing the policy in trust so that it pays out directly to your dependents and never becomes part of your estate, avoiding inheritance tax and speeding up the payout. Most life insurance policies include the option about writing in trust directly at no extra cost. But, think carefully about who the policy is designed to go to, as it can be difficult to remove someone who you have nominated in a trust if you change your mind, and seek independent legal advice if necessary.
- Waiver of premium. If illness prevents you from working your monthly life insurance premiums are paid on your behalf for set period. This will add to the cost of your life insurance policy and it's important to weigh up this cost against any income protection policy that you may also have.