How to waste £10,000 on life cover?

Buying a life insurance policy from a bank or building society could mean wasting tens of thousands of pounds.

That is because lenders – without telling the customer – add their own markup of as much as 50pc to the price available elsewhere. Even going direct to the insurer will, bizarrely, sometimes end up costing policyholders far more.

The difference between the best and worst prices for the same cover, if you add up the premiums over the term of the policy, can run to many thousands of pounds.

So where is the best place to buy your policy?

There are three main sellers of life insurance policies and other, similar cover, such as critical illness insurance. These are lenders such as a bank or building society, intermediaries such as an adviser or broker and direct from the insurance company. Not all insurers sell their products via all three channels, but many do.

Most banks and building societies have agreements in place with insurance companies to sell their policies to customers. Many have "single-tie" deals – where they sell products from only one insurance company.
The Sunday Telegraph investigated the cost of Legal & General policies, which are sold under single-tie deals by Nationwide Building Society and Yorkshire Building Society, and Aviva policies, which are sold under a single-tie deal by Tesco Bank.
These companies were chosen because they all offer online quotes for life and critical illness products.
We obtained quotes for a 30-year-old and a 40-year-old man for £250,000 worth of life and critical illness insurance, lasting 25 years, from the lenders and direct from the insurers.
We also requested quotes from a financial adviser, Alan Lakey of Highclere Financial Services, for exactly the same policies.
The results show that in many cases the lenders and even the insurers themselves charge far more than intermediaries for exactly the same life and critical illness policies. For example, a "decreasing-term" (explained below) life insurance policy for £250,000 will cost a 30-year-old male smoker £15.65 a month through an adviser. Legal & General and Nationwide charge £18 a month, while Yorkshire charges £23.66 – a staggering 51pc more than an adviser for exactly the same cover.
That works out at an extra £2,403 over the 25-year term of the policy.
A "level-term" life and critical illness policy for £250,000 from Legal & General will cost a 30-year-old male smoker £90.36 a month when bought through an adviser. But if the policyholder was sold the same cover in a branch of Nationwide, he would pay around £95.
Yorkshire charges its customers £120.55 a month for the policy – 33pc more than an adviser. That's an extra £9,057 over the 25 years. Insurers and the lenders struggled to explain the extent of the markup.
When The Sunday Telegraph asked the Yorkshire why its members were being required to pay such a high price for the cover, a spokesman deflected the question, but said: "We continually strive to ensure that all our products, including those we offer through third parties, provide the best overall value for our customers."
Guy Simmonds, head of protection and investment products at Nationwide Building Society, said the extra cost was down to advice given to the customers by salesmen in branches. He said: "Nationwide offers high-quality protection, backed by face-to-face advice available nationally on the high street, at the same price as is available directly from the insurer. Seeking advice, particularly given the need for correct disclosure and completion of forms, is very important when it comes to ensuring customers gain the protection cover they require."
That raises the question of quite why the cover costs so much when bought directly from Legal & General, where no advice is automatically given. Again, there was no clear answer.
A Legal & General spokesman said: "We would encourage people to understand what they are buying, if they want advice or not and to shop around. As with any other industry, it makes sense to do this, both on the high street and online, to get the best price and level of cover that meets the customer's needs. The cheapest price does not always mean the best level of cover or service."
Other insurers' products are also priced in the same, confusing way.
Tesco sells Aviva life and critical illness policies rebranded as Tesco Bank policies. Tesco charges more than an intermediary such as a broker for an identical policy, but Aviva charges the most for its own products by a considerable margin.
For example, a level-term life assurance policy for £250,000 would cost a 40-year-old male non-smoker £23.08 through an adviser, £29.85 through Tesco Bank and £35.30 if bought directly from Aviva.
That is a difference of 53pc between the lowest and highest prices, which adds up to an extra £3,465 over the term.
Tom Allen, head of protection pricing at Aviva, said the insurer's prices reflected the cost of distributing the products to its customers. He said Aviva was comfortable selling its products at a higher price than other distributors because some customers valued convenience and direct access to the brand over price.
Customers who have bought expensive life and critical illness cover are not stuck with their existing policies. It is possible for many policyholders to switch to new cover that could offer better protection for less. But not everyone is able to do this: if your heath has deteriorated, you have taken up smoking or your circumstances have changed in some other way, you may no longer qualify for the same cover.
Mr Lakey said: "Your bank or building society, or even your insurer, will not necessarily give you the best deal. In many instances, people who have an existing policy will be able to switch to a better-quality policy for a lower premium. This is particularly true for people who bought their policy before 2010 because policies have improved significantly since then.
"It is important to check the premium you are paying to see whether there is a better deal available on the market."
Term cover - how it works
Life insurance is often sold alongside a mortgage, which is why banks and building societies are so well placed to offer it. "Whole-of-life" cover pays out whenever you die but is more costly. Term cover, which is more common and cheaper, pays a set sum on the death of the policyholder if it occurs within a fixed period, say 25 years.
The term is often linked to the length of the mortgage, typically 25 years.
A cheaper form of cover is called "decreasing-term" life assurance. The potential payout on death decreases over time, as the amount owed on the mortgage falls.
Borrowers can add critical illness cover to life insurance policies for an additional cost. Critical illness cover pays out if the policyholder suffers from a serious illness or death during the term of the policy. The tax-free lump sum received is often used to pay off a mortgage or other debts or to cover medical or household bills.