Coronavirus Travel Rights
23 April 2021
Sadly if there's one thing that's certain, it's that we're all eventually going to die. It's not a cheerful topic, but if anyone depends on your income, planning for their future if the worst were to happen could be invaluable – and life insurance is one of the cheapest ways to protect your family's finances. This guide takes you through the types available, what to watch out for and how to find the cheapest policy.
Put simply, it's an insurance policy that pays out a set sum if you were to die while it's in force. Its aim is to provide financial support to anyone you leave behind, to prevent the loss of your income from causing a crisis, and adding to the grief.
Level term is the simplest type of life insurance and the name actually tells you all you need to know...
The more cover you get and the longer the term you want, the more it costs. You pay via a monthly premium which continues until the policy either pays out (if you were to die during the term) or the term ends.
This guide focuses on level-term life insurance policies, though before you go on, do check these alternative cover types to assess if they'd suit you better.
Decreasing term – where the payout reduces in line with your mortgage balance
This is designed to cover your mortgage if you were to die during the term, so the amount you're covered for decreases in line with your mortgage debt.
It's often cheaper than level-term, 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 is likely to be a better option (though you could always have both). See our Mortgage Life Insurance guide for full information.
Family income benefit (FIB) – provides a regular income, rather than a lump sum
This provides an annual tax-free payment for the length of the policy term, eg, £10,000/yr for 10 years. So if you died five years into the policy, your dependents would receive £10k for each of the remaining five years.
The amount it pays out therefore reduces over time, so policies tend to be cheaper than level term.
Over-50s' life insurance – guaranteed acceptance but it's much more expensive
Insurers work out if they'll accept you and how much you'd pay based on a number of factors including your age and health. However an over-50s' policy is an alternative which offers guaranteed acceptance up to age 80 or 85.
Yet to compensate these are much more expensive, you can't claim in the first one or two years and you could get back less than you pay in. For full information and warnings, see our Over-50s' Life Insurance guide.
Whole of life insurance – usually to cover inheritance tax
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. Due to this, these are usually an expensive option.
This is something every parent, partner, or person with any other type of dependant needs to consider. If anyone relies on your income and would struggle without you around, a life insurance policy can be a cheap way to ensure they have a financial lifeline when you're gone.
Though, ultimately, you don't need to have life insurance cover, so you'll need to weigh up whether the monthly cost is worth it for you. To help, here are some key points to consider:
This may be determined by the monthly payment you can afford, but a good rule of thumb is to aim for 10 times the annual income of the highest earner.
This may seem high, but it's likely to leave enough money (after the impact of inflation) to cover mortgage repayments and expenses, such as childcare costs – which may be a new outlay. It could also go a way to supplement the income of those left behind if they had to then leave employment, for example to care for children or relatives.
To help you calculate a figure that works for you, it's worth ensuring any policy covers the following:
How long should the term be?
A policy covering children should last until they'd no longer be reliant on you/your partner, 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.
Should I take out critical illness cover?
This is a common add-on to life insurance policies, though you can also get standalone policies. We're not big fans of critical illness insurance as 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"; as 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 level term cover and a separate income protection policy – which protects your income from a range of eventualities. If you want critical illness though, it's worth speaking to a financial adviser.
If you think level term life insurance is right for you, here are our key need-to-knows to understand before opting for a new policy.
When you buy life insurance cover you will be given two choices of monthly payment (premium) – 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, often cost less at first, but your insurer can hike costs later on, meaning a cheap deal can potentially become costly as you age.
It's important you're open and honest with any information you provide, to ensure any policy that's set up for is fit for your needs – and will cover you if the worst were to happen and your dependants needed to make a claim.
Likely things you'll need to disclose when getting a quote for a policy include your age, whether you smoke, your occupation and your health history. The insurer then uses this information to determine whether it will cover you and a price.
If you're comparing quotes yourself via a discount broker, you'll usually answer a few basic questions to see initial prices, but will then have to disclose much more detailed information if you then go through to the insurer to apply, which could affect the price/the decision to insure you.
As each insurer has its own rules on pre-existing medical conditions, if you've a complicated medical history, it's worth getting advice before you buy. This is helpful as brokers tend to know which insurers will cover your condition(s), and at the best rates.
If you're over 50, you can get a policy with guaranteed acceptance – but it's much more expensive
If you don't want to disclose health issues and are 50 or over, an over-50 policy is an alternative which doesn't require any health questions and there's guaranteed acceptance up to age 80 or 85. Yet to compensate these are much more expensive, you can't claim in the first one or two years and you could get back less than you pay in.
For full information and warnings, see our Over-50s' Life Insurance guide.
Level term life insurance policies can either be taken out to cover just you – a single policy – or yourself and your partner – a joint policy.
A joint policy is often cheaper, however it only provides one payout, usually on the death of the first policyholder, when the cover then stops. This is usually best suited if your partner is your only dependant and you'd have no one else to leave a second payout to.
However, if you had a joint policy and were to later split with your partner, you'd need a new single policy, and this could be more expensive as it would be based on your new age and health.
Taking out two single policies is usually more expensive, but here you would get two payouts if you were both to die during each policy term. Equally it covers you personally, so works independently to whether you are still together with your partner or not.
If you die with an active life insurance policy, the payout forms part of your estate, which could mean it's hit with a huge whack of Inheritance Tax. Yet, 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 the policy is written in trust, the insurance pays out directly to your dependants, so it never becomes part of your estate, which avoids inheritance tax and often speeds up the payout.
It's relatively easy to do as most insurance policies include the option (and papers) for writing in trust directly at no extra charge. Note that there are different types of trusts and they can be difficult to change or cancel, even if all your beneficiaries agree, so think carefully about who a payout would be going to.
Life insurance usually gets more expensive with age, so savings aren't always possible. The fact you're older, or if you've had health conditions since you got the policy can mean new policies are more expensive than the one you have. Yet there's no harm getting a quote, especially if any of the following applies:
Many things can happen during the lifespan of the policy, and while your broker or mortgage insurance company may be doing well now, it could be a different scenario 20 years down the line. Here's how you could be affected:
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 your policy or issue a substitute one. Equally, if you've ongoing claims, or need to claim before a new insurer is found, the FSCS should ensure you're covered.
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.
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.
As a level term policy only pays a fixed amount on death (and there's usually little dispute over whether someone is dead or not), then providing the company is reputable, it's just a case of the cheaper the policy, the better.
Never blindly go with a policy offered to you by your bank or direct with a insurer, as this is the most expensive way.
Instead, you should get quotes from a number of insurers. Yet unlike other insurance such as car or home, the cheapest prices are not on common comparison sites.
When someone buys a life insurance policy, the 'referrer' gets paid a large commission – so buy a policy via a comparison site and it gets a whack of cash (even if you then went and bought direct from the insurer you wouldn't save as insurers just keep the commission themselves).
Yet go via a specialist discount broker and it passes this extra cash to you as a discount (hence the name). There's usually a one-off £25 fee to pay, but as it can save you £1,000s over the life of policy. It's an easy win. You'll pay more if you're looking for advice on the type of policy to get, yet advisory brokers are still often much cheaper than getting quotes yourself on comparison sites or direct.
To show how vastly costs can differ depending on how you buy, we used the same details to run quotes from brokers, comparison sites and direct with banks and insurers. As this shows, you savings of around 45% are possible by buying a policy via a discount broker, compared with going direct to an insurer.
Having compared 10 discount brokers in the market for a range of quotes, here are our top brokers to try. All are online, pass on commission and most charge a one-off £25 fee. However as each has a different deal with the insurers they compare, the amount of overall discount will vary.
We'd suggest checking at least the top two and add in the rest if you've time. Remember if you're not sure what you're doing, consider getting advice.
The discount brokers above are 'execution only', so they just find you the cheapest policy – without giving advice.
If you're not sure what kind of policy you need, or you have complicated medical conditions or other circumstances, it's worth getting advice on buying cover. Doing this means the advisor will take some commission, so you'll usually pay more than via a discount broker – though it could result in a better fit policy.
As with discount brokers, we'd suggest checking at least the top two and add in the third if you've time.
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). IFAs 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.
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