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Candid Money Guide to: Buying life insurance

Life insurance is a sensible precaution for most of us at some point in our lives, usually when settling down with a partner and/or having children. It's generally straightforward and needn't cost the earth, but it pays to know what type of policy to buy and the cheapest place to buy it.

When buying life insurance there's usually the option to add critical illness cover, which pays out in the event you suffer from a life threatening illness such as cancer. This tends to increase cost significantly (because you're more likely to suffer a critical illness than die during the policy term), but might be worthwhile if you can afford it. We've excluded critical illness here as it's a more complex product than life insurance (due to various exclusions etc.), but you can find out more in our protection section.

Action Points

1. Ask yourself whether you need life insurance

Unless there's someone who depends on you financially, such as a partner and/or children, then you probably don't need life cover. If you do have financial dependents then ask yourself how they'd cope financially without you, if they'd struggle then life cover is likely to be a good idea.

Life cover is also sometimes used to help pay a potential inheritance tax bill when you die. If you want life cover for this purpose then it could prove very expensive, so consider other ways to reduce the potential inheritance tax bill first.

2. Check whether you already have cover

If you're employed you may already enjoy life cover via your employer, often called a ‘death in service' benefit. And if you have an endowment, that will provide some cover too.

3. Decide whether to buy single or joint life cover

Life cover can be taken out on either single or joint lives, e.g. just yourself, or you and your partner. If you have a partner and you'd both struggle financially if the other died then joint cover (or a single life policy each) is likely to be more appropriate.

When taking out joint life cover you'll also need to decide whether it pays out on the first or second death. First death is appropriate if your partner would require the money to live on in your absence, whereas second death could be more appropriate if the money is intended to pass to children or help fund an inheritance tax bill.

4. Estimate how much life cover you need

The best way to answer this is to consider all the people who are financially dependent on you and estimate how much they'd need to get by if you weren't here. You should also include any debts, such as a mortgage or loans, and the cost of a funeral. The cover should last for as long as you'll have financial dependents.

A very simple rule of thumb is cover of ten times your annual income, but much better to calculate a more accurate figure using our Life Insurance Cover Calculator.

5. Consider factors that might affect cost or cover

If you have a dangerous job or hobby then expect to pay higher premiums or even be refused cover. You'll also face higher premiums if you smoke or have health problems that affect your life expectancy. Most insurers will only accept you're a non-smoker if you haven't smoked within the last 12 months.

6. Consider term assurance

Unless you're looking to cover an inheritance tax bill or insure beyond age 80 (in which case go to point 7) then term assurance offers the most straightforward and cost effective life cover solution. You simply specify how much cover you want (the ‘sum assured') and the period of time you want the cover to last for (usually up to 40 years subject to cover not passing beyond your 80th birthday) and the insurer charges a fixed monthly premium throughout the term. If you no longer need the cover in future you can simply cancel the policy and stop paying the premiums, usually without penalty.

Term assurance policies pay out a tax-free lump sum when the insured person dies. A variation, called Family Income Benefit, pays a regular income for the remainder of the policy term instead. Go to point 8.

7. Consider whole of life insurance

Whole of life policies are intended to be held until you die, whenever that may be. This makes them more expensive than term assurance as the insurer will definitely have to pay out in future – plus you may have to pay premiums up until you die. Your premiums are usually invested and the cost of life cover deducted from the fund, so the amount you pay can be affected by investment performance as well as age. Whole of life policies are best avoided unless you really want to ensure a payout at whatever age you die – assuming you can afford the ongoing premiums.

8. Shop around for the best deal

Term assurance is a simple product which makes shopping around for the best deal straightforward. Just ensure that the premiums are fixed for the duration of the cover as a few companies offer ‘reviewable' premiums that can rise over time. You can try a combination of discount brokers, comparison websites and insurers directly (more details below). If you're in any doubt then seek independent financial advice.

Whole of life is more difficult to compare as you'll need to factor in potential investment performance and costs, so consider seeking independent advice – although beware, whole of life insurance usually pays pay high sales commissions.

9. Write the death benefits in trust

Whatever type of life cover you buy it's almost always a good idea to ensure that any payout will be passed directly to the beneficiary (e.g. your partner) and not into your estate, where it might be subject to inheritance tax. This also means the beneficiary should get the money more quickly. To do this make sure that your life insurance policy is 'written in trust' using a flexible trust (that lets you change beneficiaries in future if you wish). All life insurance companies should supply the necessary form free of charge.

Shopping around for term assurance (all links are unpaid)

Sample quotes, where shown, are the monthly premium for a non-smoking 30 year old male requiring £200,000 of level term assurance cover for 20 years as at 15 September 2010.

Financial advisers

If you buy term assurance through a financial adviser they'll usually receives a sales commission of up to one and half times the first year's total premium. This is built into the premiums you pay so they probably won't be the cheapest, although you should receive advice in return.

Discount brokers

A good discount broker should waive all commission to reduce term assurance premiums, in return for a nominal admin fee. They should also be able to compare prices from different insurers, although as most use the same comparison engine (webline) the results are likely to be similar, if not the same. This will often be the cheapest route and it's always worth getting a quote for comparison.

BrokerBest QuoteInsurerAdmin fee
Moneyworld.com £7.03 Aviva £25*
Cavendish Online £7.03 Aviva £25*
MoneyMinder £7.95 L&G £30
* refunded if cover declined.

Price comparison websites

Price comparison websites normally compare term assurance quotes from a range of insurers and brokers. The results tend to be rather hit and miss, sometimes beating the discount brokers but more often than not being more expensive. Nevertheless, it's worth checking one or two comparison sites to see how the quotes stack up.

Comparison SiteBest QuoteInsurer
Moneysupermarket £8.33 Aviva
Gocompare £9.45 Aviva
Comparethemarket £9.02 Aviva

Insurers direct

Rarely the cheapest option, as the quotes below show.

InsurerQuote
Aviva £10.78
Tesco £9.34
Direct Line £13.28

Questions

Can I save money on my existing life cover?

If you have term assurance then you may be able to get a cheaper deal, although as the cost of taking out a new policy rises with age it will probably depend on how long ago you took out your existing policy. Nevertheless, it can't hurt to spend a few minutes finding out. If you decide to switch policies then don't cancel your existing cover until the new policy is in force to ensure continuous cover.

Can I cancel a whole of life policy?

Yes, but don't be surprised if the surrender value is derisory due to the costs of life cover, charges and (possibly) poor performance.

Useful Links

Read more about life cover on our life cover page in the protection section.

Use our Life Insurance Cover Calculator to estimate how much cover you need.

Use our Life Expectancy Calculator to estimate how long you might live, on average.

Use our Death Probability Calculator to estimate the chances of dying before a certain age, based on average figures.

© Candid Money Limited 2012.