by Ben Salisbury
Life insurance is a type of policy that pays out a lump sum to your dependents if you die within the terms of the cover. For example, you could sign up for a 20-year policy that pays out a lump sum of £200,000 if you die within the 20 years. As a rule you should look to get cover for ten times the amount of the highest salary of your household.
Who should get life insurance?
If you have a family you should consider taking out a life insurance policy. You should aim for a policy that provides a pay-out that covers any outstanding debts and provides your dependents with a reasonable standard of living.
Some employers offer a ‘death in service’ benefit. If this is the case for you, then subtract this amount from the life insurance cover you need. This should lower your premiums.
If you are single, then life insurance is probably not for you. However, you could consider taking out an income protection policy, which will provide you with an income, should you lose your job.
1: Start paying early
The rule of thumb with life insurance is to start paying early. If you are in your 20’s and in good health, you can get a good life insurance policy for just over £1 a week. With every six months that pass, your quote for life insurance will increase.
As you get older, the likelihood of becoming ill increases and life insurance will cost you more. On the other hand, if you decide you do need it, then the younger you are when you take out the policy the better. This is because once you have the policy, getting older won’t increase the cost of the policy and you will be covered for any illness that develops subsequent to you taking out the policy.
2: Stop smoking and look after your health
If you smoke and you are young, you will pay more for a policy. If you smoke and you are older, you will pay a lot more for a life insurance policy. If you can give up, do. There are all sorts of benefits, but in terms of life insurance you will pay less and be more likely to be accepted for it. To qualify as a non-smoker you have to be genuinely smoke-free for one year.
If you are overweight or have a serious illness, this will increase your premiums. In this situation it does pay to shop around. Insurers assess factors like this differently; if one insurer charges you 50 per cent more for being overweight, it does not necessarily mean that all of them will.
3: Shop around and use a price comparison site that compares the whole of the market
Most independent advisors receive commission from certain insurance providers. The beauty of comparison sites is that you can see the best offers from the vast majority of the market in just a few minutes.
You can also modify your criteria to check out what you would pay for slightly more or less cover and tailor it to your individual circumstances. Remember, some insurers, like Direct Line and Aviva, don’t allow their policies to be included in comparison sites, so you need to check them separately.
4: Decide if you should use a broker or not
In most insurance scenarios you should avoid brokers and middlemen, but with life insurance it is slightly different. Brokers still get large commissions when they sell you a policy, but if you use ‘execution only’ brokers, you get the commission in return for paying a fee. Because the size of the commission is so high, you get the policy at a lower price than you would on a price comparison site.
5: Don’t pay for advice
It is important that you check anything you are unsure of and make sure you get the right insurance to protect your family. If you want to check something, ask for advice; however, you shouldn’t pay for that advice.
Most financial advisors are paid commission by insurance companies – but so are the advisors on comparison sites. The one on myfinances.co.uk has an option to call a number for advice. The sites receive commission, but you don’t have to pay for anything other than the policy cost.
6: Take out separate policies
If you and your partner decide to take out life insurance at the same time, remember that a joint policy only pays out after the first person dies. If you have children it is more beneficial to them to receive two payments, which will be the case if you have separate policies.
7: Disclose everything
It is very tempting to not mention certain aspects of your lifestyle that could hinder your attempts at getting life insurance or push the price up. Avoid this because if, for instance, you die and it is discovered that you were a smoker but had neglected to tell your life insurance providers, it can make the policy invalid and your family will not receive any money.
8: Avoid offers from banks, building societies and mortgage lenders
The problem with offers of life insurance form these institutions is that they only use one provider, with one price. It is very unlikely that the policy will be the cheapest for you. They also tend to try and flog you other products when you are meeting them about something else. For instance, if you are trying to negotiate your overdraft, you may feel pressurised into saying yes. If you want to get the best value life insurance always say no to these institutions!
9: Make sure your policy is written into a trust
This is a very important point and one that is not as difficult to organise as you might imagine. You need to get your life insurance policy written into trust to avoid the taxman getting any of the payout via inheritance tax.
You may have to search harder to get this service at a cheap rate and you may feel more comfortable if a solicitor arranges it for you but some price comparison sites do offer this service. As ever, it pays to shop around.
10: Go for the cheapest policy
With many types of insurance cheap is not always good. It is more important to have the right cover for your circumstances. However, life insurance is a bit different. There is only one real circumstance, that is, your dependents will be paid a lump sum if you die within the terms of the cover. Most life insurance policies have the same features and, in essence, are the same policies, just marketed by separate brands, so the cheapest policy is the best policy.
Twitter: My Finances
Join the conversation at #news_myfinances