Life Insurance Protect your family’s finances

It's thought Level Term Life Assurance is one of the cheapest ways to protect your family's income if the worst happens.

The sobering statistic is nearly one child in 20 loses a parent before they've finished full time education. This step-by-step guide will show you how to save £1,000s and often beat even the published best buys by 40%.

What is level term life assurance?

In a nutshell this is a life insurance policy that pays out to your dependents if you die, but there are two keys words:

• Term: This means you only get a payout if you die within a fixed term e.g. 18 years.

• Level: This means because the payout you get doesn't vary, it's always at a set amount.

Therefore all in all, level term assurance guarantees a lump sum payout upon death within a fixed time e.g. £150,000 if you die within the next 18 years. It's the one policy you hope won't pay out!

Don't confuse it with...

It's easy to confuse with other similar policies. So here's a quick list of things it isn't:

• Mortgage Term Assurance

  This is bought to pay off your mortgage in case you die. It's also sometimes called 'decreasing term assurance' as the amount it pays out decreases as your mortgage decreases. For more on this read the Mortgage Life Insurance guide.

• Whole of Life Insurance

  This is an open ended investment based policy mainly used for inheritance tax planning that runs out when you die, rather than after a fixed time.

Is it worth having?

That depends on you. If you're a single person with no dependents, then you're far better off to focus on your own finances.

For everyone else, 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 probably don't 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.

Why is it assurance not insurance?

If you are wondering why it is life ‘assurance' not ‘insurance', that's because assurance is for something that is certain to happen, insurance is where there is only a risk of it happening... and death is assured. Though some do call this ‘insurance' too as there's no guarantee you'll die within the term.

The Key Decisions

The cover and ensuring cost depends on a range of factors. It's also worth noting prices can change daily, so if you're comparing a range of companies it's worth doing all at the same time.

• Higher payouts cost more

  The payout should aim to pay-off any outstanding debts and provide your dependants with a reasonable standard of living. Check whether your work place already offers you ‘death in service' benefit. If it does, deduct from the total cover you need.

  Cover may also be needed for a non-working spouse, especially when children are young, as if they died the main earner may need to stop working. A very rough rule of thumb for either parent is ten times the highest earner's income.

  Therefore the cost has to be balance against the impact on your pocket. If covering the full 'rule of thumb' amount is prohibitive; try working out what the most you can afford is (the budget planner should help) and then see what that gets you.

  If you're wanting to provide a regular income for your family, rather than a lump sum, the Family Income Benefit is an alternative. This provides an annual tax free payment for a set period. Some of the best buy brokers below offer quotes for a FIB but if you're not sure if it's for you read the Getting Advice section.

• Shorter terms cost less

  A policy covering children should last until they no longer need to be reliant on you, so at least until they finish full time education. To cover a partner it should last until the earner reaches pensionable age. Don't feel obliged to cover a round number of years e.g. policies may be for 17 years.

• The less risk you'll die, the cheaper

  The amount paid increases with the likelihood of death within the term - age, health, being a smoker, having a risky occupation, can increase the price. So 98 year old, tobacco chewing racing drivers who like 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 they can use 'non-disclosure' as an excuse not to pay out.

  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 they don't require you to answer any health questions and there's guaranteed acceptance up to age 80 or 85. Yet to compensate they are MUCH more expensive and you can't claim in the first one or two years.

  Companies offering these include Aviva, Direct Line, Engage Mutual*, L&G*, Post Office, Scottish Friendly*. Get a quote from as many as possible.

• Do it as a couple?

  Couples can go for either separate or joint policies which pay out on the first death. However a joint policy would only be suitable if you need to pay out the same amount for both partners. Even if a joint policy does look suitable, it's worth getting quotes for standalone policies anyway, as it's often cheaper.

• Quit smoking or planning to?

  Non-smokers pay a lot less cash than smokers, simply because they're a lot less likely to die during the term. To count as a 'non-smoker' you need to have been genuinely smoke free for at least a year.

  Therefore one year after the date you quit, you should go through this process to get a new deal and you should save enormously. Don't be tempted to lie though... if you were to die and it was discovered you had been a smoker it could invalidate the policy. See other saving in the Stop Smoking MoneySaving guide.

• Already got mortgage life assurance?

  Many already have life insurance policies specifically designated to pay off your mortgage in case you die within that term - it's called Mortgage Term Assurance. Many mistakenly believe this is all the cover they need. Yet if you remember it all that does is mean your home would be repaid, it wouldn't provide any income to live on.

  If you have a mortgage assurance policy, then simply delete the mortgage debt from the 'outstanding debts' you'd need to repay if you died when working out how much level term cover you need. However, do also note it may be cheaper to use a level term instead of a mortgage policy to cover both your home and family. More details in the Mortgage Life Insurance article.

• Does this logic apply to critical illness policies too?

  We're not big fans of critical illness policies. 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 does just that - protects your income from a range of eventualities. If you want critical illness though, speak to an advisor.

• Am I protected if the broker or insurer goes bust?

  The only payment you're likely to make to a broker will be any fees and charges, the bulk of your money will go straight to the insurance provider. These are covered by the same government-backed Financial Services Compensation Scheme (FSCS) as banks, meaning if they go into default, you’re protected.

  In the unlikely event it happened, the FSCS will try and find another provider 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 the Savings Safety guide.

• Already got cover? Is it worth switching

  If you have a level term policy, this guide should enable you to cut the cost. However if you've an existing policy you bought many years ago or have experienced health problems, the savings from buying a cheaper way may be cancelled out by the fact your risk level has increased.

  If when you get a quote it shows you can save (check the cover is at the same level though), all you need to do is set up the new cover and once you've got confirmation, end your existing policy; though a quick check of its terms and conditions first never goes amiss.

• What is writing in trust?

  If you die the life assurance 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, as long as this is done at the time the policy is taken out.

  Do this and the insurance pays out directly to your dependents, so it never becomes part of your estate, avoiding inheritance tax and speeding up the payout.

  This is relatively easy to do. When you get most insurance policies they include the option (and papers) about writing in trust directly at no extra charge. Although do note that once a trust has been set up it is very difficult to cancel, even if all your beneficiaries agree, so think carefully about who a policy is designed to go to.

  If you decide to do this you will most likely need to get advice.

• Feb 2011: Prices rises imminent!

  In Feb 2011 the EU Court ruled that from Dec 2012 gender can't be factored into insurance costs (see the MSE News story EU insurance ban) meaning life cover prices could rise sharply.

  Before now men pay more as the risk of dying within the term's higher. So price equality means women's costs will likely rise and even though the rules don't change yet, as life insurance policies often last 20 years with guaranteed prices, according to broker Lifesearch, price hikes are expected soon adding possibly 10% to the cost over the term.

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Finding the cheapest policy

While some may be worried that 'cheaper isn't better', with level term assurance there's no investment element as the payout is fixed; and there's no argument over whether someone is dead so this is a truly simple policy in fact in most cases, provided you've disclosed adequately..

"It's simply a case of the cheaper the better!"

Cheapest policies

Life assurance prices change every day, therefore there's no single '‘best-buy insurer'; yet there are 'best buy brokers'. This may surprise you, as a broker's job is to trawl through life insurers to find the lowest priced policy for you, so you may think they'll all find the same policy... yet some brokers get HUGE commissions from policy providers when they flog you a policy.

Brokers aren't all the same. Commission levels and commercial relationships can massively impact what you pay.

The way to get policies even cheaper than going direct is to use the niche 'execution only' brokers that give you the commission, and instead you just pay a small fee, and as such you get identical policies but at a much, much lower price.

Quick broker warnings...

There are a few warnings that go with using an 'execution only' broker:

• Premiums: Check the premiums (monthly payments) are guaranteed and not reviewable.

• No advice: The fact they're 'execution only' means they just find you the price without giving any advice. If you'd like advice, to ensure you have the right cover (or have some come back if it's not), read the Getting Advice section.

• Health: Remember all quotes are based on a healthy person so your price may go up if you have any health issues.

• T&Cs: Always check the full terms of the policy meet your needs before you buy.

• Reputation: Is the company is reputable? If you haven't had feedback from elsewhere, ask in the MSE Forum.

Lowest Quote Brokers

Having surveyed over 20 insurers for a range of quotes, there are a few which are always competing to be cheapest; 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.

Is it worth getting quotes from direct sellers too?

All brokers cover the same main life assurers, but they don't include the direct sales policies from the likes of Tesco*, Direct Line or Sainsbury*. Yet their prices are consistently more expensive than the cheapest brokers, so whilst for belt and braces you could include them in your quotes, we've rarely seen it.

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Cheapest 'with advice' brokers

It's important to understand that all the above winning brokers are 'execution only'. This means they don't give you advice, they just find you the cheapest policy within the parameters you set, and if you get it wrong it can end up costing you more in the long run.

If you have complicated circumstances, such as medical conditions or complex trust issues, want a waiver of premium (where you don't have to continue making monthly payments if you become seriously ill or disabled) or really want a critical illness, income protection policy or family income benefit, it is worth considering getting advice on how to buy the policy, yet doing this means it will take some commission and you'll therefore pay more.

Still if you're unsure what you're doing it's often worth it.

The Cost Differences

A 45 year old female non-smoker buying a £200,000 level term policy lasting 20 years would pay £24.00 a month to a typical full commission provider. If you choose to go execution only then the savings can be huge (but you've no comeback).