The sobering statistic is nearly one child in 30 loses a parent before they've finished full-time education. The grief is often compounded by financial problems – but life insurance is one of the cheapest ways to protect your family's finances if the worst happens.
However, it's very easy to pay £1,000s more than you need to over the life of the policy – even if you get it through a comparison site – due to huge commissions. Therefore, this guide not only takes you through how to work out if life insurance is right for you, but also how to get it the cheapest way.
Life insurance has many purposes: to protect a mortgage, to serve as an investment, or to provide a way to mitigate inheritance tax. Yet here we're focusing solely on life insurance taken out to provide money for your family if you or your partner were to die. This is something every parent, partner, or person with any other type of dependant needs to consider.
The key product for doing this is called 'level term' life insurance or assurance (you insure something that MAY happen, while you assure something that WILL happen. Death is of course assured, but as the question is "will you die within a set time?" many call it insurance), and here's what you need to know.
Level term life insurance pays out a set amount if you die within a fixed term
This is the simplest type of life insurance and the name actually tells you all you need to know...
Level: The payout you get doesn't vary. It's always at a set amount regardless of when you die during the term, eg, £200,000
Term: You only get a payout if you die within a fixed term, eg, 18 years
So all in all the cover guarantees a lump sum payout upon death to your dependants within a fixed time, for example, £200,000 if you die within the next 18 years. Obviously, the more cover you get and the longer the term you want, the more it costs.
It's also worth noting that as the policy only pays out on death (or terminal illness) – and there's usually little dispute over whether someone is dead or not – and it pays a fixed amount, then providing the company is reputable...
It's just a case of the cheaper the policy, the better.
Don't confuse it with other types of life insurance
This is just one type of life insurance, there are others that do different jobs including:
- Mortgage decreasing term insurance: This pays out enough to cover your mortgage if you die within a set term. As mortgage debt decreases over time, the amount it pays also decreases (it's often called 'decreasing term assurance' because of this). It is cheaper than level term life assurance as what an insurer has to pay out is likely to be much less. See our Mortgage Life Insurance guide for how to get it. However, if you want to leave a lump sum for your dependants to cover other debts and ongoing spending, a level term life insurance policy, while more expensive, is likely to be a better option.
- Whole of life insurance: These are often (but not always) investment-linked life insurance policies mainly used to mitigate inheritance tax. In other words, the payout amount should cover the inheritance tax bill on death, and the policy runs out when you die, instead of after a fixed time.
Why get life insurance if you don't have dependants?
If you have no dependants and are single, then you'd be right to question why you would bother to get this policy. This is all about paying out when you're gone, so if you've no one you want the money to go to, don't bother.
However, if you do have dependants, such as a partner and/or children or anyone else who relies on your income, then ask yourself: what would happen financially to the people around me if I died?
If the answer is there'd be little financial impact, then you may not need a policy. But if paying the bills, the mortgage, bringing up kids, food shopping and more would be a struggle, this is a cheap way to solve that.
Cover 10 times the annual income of the highest earner till your kids have finished full-time education
The sum you choose for your policy is important. As a very rough rule of thumb, you should be thinking about getting 10 times the annual salary of the highest earner in the household, yet you don't have to stick with that. It may just be a case of do what you can afford – the budget planner should help. Here are some things you should take into account. It should cover...
- Any outstanding debts that need to be paid off (including a mortgage if you don't have a separate policy)
- Immediate outgoings your dependants would need to pay
- Future spending you would have wanted to make, eg, university fees for the kids
- Any additional expenses a death may trigger, such as funeral costs
While 10 times your income may seem high, it's worth remembering that inflation will mean the value of this payout is less in, say, 10 years' time than it is now, and you're getting cover to last you that long (or longer if you choose a greater term).
Your dependants don't have to pay any income tax on the payout, but it does count as part of your estate so if your total assets are above the inheritance tax (IHT) threshold, they will have to pay 40% (ouch!) IHT on it. This can be avoided by putting the policy into something called a trust, see below for more info.
How long should the term be?
A policy covering children should last until they are no longer reliant on you, so that's generally at least until they finish full-time education. If you're planning on having more children you may want to estimate when that'd be rather than trying to extend or get a new policy later. This is because cover becomes more expensive the older you get.
To cover a partner it should last until the year you expect to reach pensionable age. Don't feel obliged to cover a round number of years, eg, policies can be for 17 years.
I've heard that Family Income Benefit may be a cheaper option. Is that right?
If you want to provide a regular income for your family, rather than a lump sum, an alternative is to take out an insurance product called Family Income Benefit (FIB). This provides an annual tax-free payment for a set period (and despite it's unfortunate name it has nothing to do with receiving benefits).
Sometimes FIB can work out cheaper than level term cover and sometimes it's the other way round – it all depends on when you die so unless you have a crystal ball this will be impossible to tell. But to demonstrate how they compare here's an example:
- FIB taken out over 10 years paying out £10,000 a year will cost £7.28 a month – if you died in the first year your dependants would receive £10k a year for 10 years, meaning a total income of £100,000. But if you died in the last year they would only get £10,000.
- Meanwhile, 10-year level term insurance for £100,000 will cost £11.10 a month but would pay out £100,000 regardless of whether you died on the first or the last day of that 10-year period.
Some of the best buy brokers below offer quotes for FIB but if you're not sure whether it's for you it's worth seeking the advice of a broker or financial adviser before you proceed. See our cheapest advisory brokers below for more.
Why is 10 times the salary of the highest earner a good rule of thumb?
Covering 10 times the salary of the highest earner in the household is a good guideline figure because it is likely to leave enough money to cover mortgage repayments and expenses. Take the example of a family where one partner works and the other stays at home to look after the children. If the working partner dies, the partner looking after the children still needs money to pay the mortgage and look after the little ones. If the partner looking after the children dies, the sum that would be paid out would be enough to cover the working partner if they had to leave full-time employment to look after the kids.
What is the best age to buy level term life insurance?
If you want to buy level term life insurance, it is best to get cover while you are as young as possible. Obviously, if you're an 18-year-old, do not own a home, are single and don't have any children, the product is not suitable, but you should consider cover as soon as you have people relying on your income.
The reason you should get cover as soon as possible is because it will cost less. Younger people are largely healthier and will have longer to live than their older counterparts and this will be reflected in the prices offered by insurers. Here's a table to illustrate this point.
|Monthly cost for £200,000 level term cover over 25 years if you take it out when you're...|
|25 years old||35 years old||45 years old|
All prices are for non-smokers. Figures obtained via Moneyworld in Nov 2014. Rates offered by L&G.
A colleague told me our employer provides cover. Can I rely on that instead?
Many employees benefit from free "death-in-service" cover through their employer. It'll pay out a multiple of your salary, typically around four times, while you are an employee of that company. The death doesn't need to occur at work or be linked to your job, but regardless, it’s not a good idea to rely on this cover as your only protection.
This is because you'll probably change jobs at some point and your next employer may not offer it and, if you've had any significant health problems in the interim, you may find it expensive to arrange your own cover.
I've been offered critical illness cover with my life policy. Should I get it?
We're not big fans of critical illness insurance. Many believe they will pay out if you get ANY serious illness and can't work. Yet that isn't true, critical or serious illness policies pay out a lump sum if you get a specific illness as defined by the terms of the policy; for example losing one leg isn't critical, but two legs is! So don't think "I'm covered for cancer"; most policies only cover a limited range of cancers.
Picking a good critical or serious illness policy would take a doctor and financial nerd combined; so one option is to get the level term cover and an income protection policy – which protects your income from a range of eventualities. If you want critical illness though, speak to a financial adviser.
Do it as a couple? Two single policies can be better than joint cover
When buying level term life insurance, you have the choice of buying a single policy or a joint couples policy. A joint policy may be marginally cheaper than getting two single policies, but it will only pay out once, usually on the first death. You used to be able to get a policy paying out on the second death but they have now become incredibly rare.
A joint policy vs two single policies
Joint policy: The pros
...a joint policy is cheaper than two single policies.
...if you are married but have no dependants it's much less hassle to set up a joint policy compared to two single ones.
Joint policy: The cons
...if you have dependants you will only get one payout, usually on the death of the first policyholder. Single policies, however, pay out twice.
...if you split with your partner you may have to cancel the cover (unless you're still on good terms) and buy two single policies, priced on your new age and health, which will be more expensive.
Two single policies: The pros
...each policy will pay out on the death of each person, rather than just on the first death, which is what happens with a joint policy. So you get two payouts rather than just one.
...if you split with your partner you would not have to buy a new policy.
Two single policies: The cons
...two singles policies are typically more expensive than a joint policy.
...if you are married but don't have dependants you will only need one payout – to your partner. So there is no need for a second payout as there would be no one for it to go to.
The less risk you'll die, the cheaper the cover
The cost of the cover increases with the likelihood of death within the term – age, health, having a risky occupation or being a smoker can increase price. So a 98-year-old tobacco chewing racing driver who likes to go cageless shark diving may struggle to get a good deal, even after reading this.
The fact pricing radically changes depending on who you are leads to an important rule...
Disclose everything; all past conditions and any risks. If not, your insurer may use 'non-disclosure' as an excuse not to pay out.
Each insurer has its own rules on pre-existing medical conditions. If you’ve had issues, it’s worth speaking to a broker, who will know which insurers will give you the best rates.
At what point you need to disclose all your medical information depends on who you buy the cover from. If you are buying it from a discount broker it's very much like getting home or car cover from a comparison site. The broker will ask you a few basic questions and then you will be sent to the website of the insurer, which will ask you for much more detailed information, such as your medical history.
Advisory brokers, on the other hand, will ask the detailed questions before you speak to the chosen insurer.
I don't want to disclose conditions. Is there another policy I can get?
If you're over 50 and have several health issues (or you don't want to disclose them) an over-50 life policy is an alternative as these don't require you to answer any health questions and there's guaranteed acceptance up to age 80 or 85. Yet to compensate these are much more expensive and you can't claim in the first one or two years.
Quitting smoking or planning to? You could get cheaper cover
Non-smokers pay a lot less than smokers, because they're a lot less likely to die during the term. To count as a non-smoker, you need to have been genuinely nicotine-free for at least a year and in some cases longer, so always check.
Therefore one year after you quit, get a new deal and you could save big. But don't be tempted to lie. If you die and it is discovered you had been a smoker, it could invalidate the policy. If you are seriously giving up, it’s a good idea to get it noted on your medical records to back up any potential claim. See other savings in the Stop Smoking MoneySaving guide.
It is also worth noting that some insurers have tightened their criteria and their cheapest policies now outline that you need to have been smoke-free for five years to count as a non-smoker.
Make sure the cost is fixed each month with 'guaranteed premiums'
When you buy level term cover you will be given two choices of premium (which is the official name for monthly insurance payments). It can be guaranteed or reviewable.
If your premiums are guaranteed, your insurer will never change the price, so you’ll know what you’ll be paying over the life of the policy. Reviewable premiums, on the other hand, cost less at first, but your insurer can hike costs later on, meaning a cheap deal can potentially become costly as you age.
Write your policy in trust and the money can't be claimed by the taxman
If you die your life insurance forms part of your estate, which could mean it's hit with a huge whack of Inheritance Tax. In many cases it's possible to avoid this by writing the policy in trust, if it's done at the time the policy is taken out.
If you write in trust the insurance pays out directly to your dependants, so it never becomes part of your estate, which avoids inheritance tax and speeds up the payout.
This is relatively easy to do. When you get most insurance policies they include the option (and papers) for writing in trust directly at no extra charge. If you know what you are doing, you can write the policy in trust yourself. If not, get advice from one of our cheapest advisory brokers or see our guide on Independent Financial Advisers.
Beware switching existing policies as it may not be worth it
If you already have a level term policy, this guide could help you cut the cost if you decide to switch but there's no guarantee you'll save. If your policy was bought years ago, or you've had health problems, the savings from buying a cheaper policy may be cancelled out by your increased risk level and/or age.
If a new quote shows you can save (make sure the cover is at the same level), all you need to do is set up the new cover. Once it's in force, cancel your existing policy. Remember to check the T&Cs carefully.
You are protected if your provider goes bust
As taking out life insurance is usually a long-term decision, many things can happen during the lifespan of the policy, and while your insurance company may be doing well now it could be a different scenario 20 years down the line. If something happens, here's how it would affect you:
- If your insurer went bust. If your provider goes bust, the Financial Services Compensation Scheme (FSCS) will try to find another insurer to take over or issue a substitute policy. However, if you’ve ongoing claims, or need to claim before a new insurer is found, the FSCS should ensure you're covered. For more see the insurance section of our Savings Safety guide.
- If your broker went bust. The only payment you're likely to make to a broker will be the fee for arranging the policy, which is often no more than £25. In the unlikely event your broker went bust after you paid it but before your insurance was arranged, the chance of you getting your money for the fee back is slim. Saying that, the FSCS would be able to help with any premiums lost as a result of a broker going bust, as these payments are ring-fenced, but this is unlikely to extend to broker fees in this instance.
How to slash the cost of life insurance
The worst way to get life insurance is by going straight to an insurer, here you pay full price and don't check whether it's the cheapest on the market. So what many people do – which makes them feel they have the best deal – is to use a comparison site. It scours the market to find you the cheapest deal. And, indeed, you feel you've saved big.
However, what comparison sites don't tell you is they're a taking a huge whack of commission by doing so. But there is a way to slash costs by using a discount broker...
The top discount brokers
Here – as long as you don't get advice – you can buy a policy through them for a fee (usually £25) and they rebate all the commission they get from the insurer into your policy. So, while the fee is a one-off £25, you can save £1,000s over the life of policy. It's an easy win.
Having surveyed the main 10 discount brokers on the market for a range of quotes, here are our top brokers. Our suggestion is to always check the top two and then add in the rest if you've time. Remember if you're not sure what you're doing, consider getting advice.
Cavendish Online and Moneyworld are the top two discount brokers offering the cheapest rates on the market, both charging a £25 fee for using their service. If your application is declined for any reason you'll get a full refund. Money Minder also charges a fee of £25 but its monthly premium can be a bit more expensive. Prices can differ between discount brokers as some offer cheaper rates from insurers they work closely with.
Huge savings using discount brokers
|Guaranteed prices over a 25-year term with £200,000 benefit|
|30 year old||45 year old|
|Monthly||Total cost||Saving if using the cheapest broker||Monthly||Total cost||Saving if using the cheapest broker|
|Cheapest discount brokers|
|Cavendish Online (£25 fee)||£7.30||£2,215||N/A||£21.90||£6,595||£30|
|Moneyworld (£25 fee)||£7.30||£2,215||N/A||£21.90||£6,595||£30|
|Money Minder (£25 fee)||£7.40||£2,245||£30||£21.80||£6,565||N/A|
|Cheapest advisory brokers|
|Life Assure Online||£10.10||£3,030||£815||£27.45||£8,235||£1,670|
|Typical comparison site, Bank and insurer|
|Typical comparison site||£8.90||£2,670||£455||£27||£8,100||£1,535|
|Typical direct bank||£11.50||£3,450||£1,235||£34.20||£10,260||£3,695|
|Typical direct insurer||£11.70||£3,510||£1,295||£34.10||£10,230||£3,665|
|All prices are for non-smokers. Figures obtained in January 2015|
The top advisory brokers
It's important to understand that the discount brokers above are "execution only". This means they don't give you advice, they just find you the cheapest policy.
If you are not sure what kind of policy you need, or you have complicated circumstances such as medical conditions, it is worth getting advice on buying cover, yet doing this means a broker will take some commission and you'll therefore pay more.
Advisory brokers will talk you through your policy options before you buy, and many brokers offer both a discount and an advisory service.
Our top advisory brokers are Cavendish Online, LifeSearch and LifeAssure Online. As well as advice on life insurance, Cavendish Online also offers guidance on annuities and pensions. LifeSearch, meanwhile, will write your policy in trust for free and offers counselling and guidance to your loved ones after you die. In addition to level term cover, Life Assure Online also sells over-50s life insurance and funeral plans.
Alternatively, you can speak to an independent financial adviser (IFA). IFAs cover life insurance, among other products, and may be able to see where it fits in with your other protection and wider money issues. It’s also a good idea if you’d prefer face-to-face advice (most brokers tend to be phone based). They are regulated and must pass exams on more subjects than brokers, though the costs can vary depending on whether you pay fees or commission. For more and how to find an adviser, see the IFA guide.
Can I complain if I get advice and it leads me to the wrong policy?
Selling life insurance is a regulated activity, which means brokers have to meet certain standards set by the Financial Conduct Authority, and you can complain if things go wrong. Anyone giving advice also needs to achieve Competent Adviser Status by taking FCA-approved exams.
Independent Financial Advisers (IFAs), meanwhile, are regulated and must pass exams on more subjects than brokers. But the costs can vary. For more information and how to find an adviser, see the IFA guide.
If you're looking for advice, you can either go via a local IFA (see the IFA guide) or a broker. Make sure you ask for the advisory service if you want it, because some providers do execution-only policies as well..