Money: Be assured of getting the best life cover

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The Independent Culture
When choosing a policy of life assurance, there are plenty of options to confuse you. Andy Couchman suggests which ones you need, and which to ignore

Sunshine roof, air conditioning, alloy wheels, metallic paint. The list of options when choosing a new car goes on and on. But what about the options list for life assurance? Here is The Independent's guide to the top 10 life assurance options.

l Policies in trust. Putting a life assurance policy in trust means that when you die the policy pays out straightaway to the person or people you want it to, and without being subject to Inheritance Tax, regardless of the size of your estate.

Most life companies will provide a suitable trust form free of charge and you do not need to use a solicitor. Two good friends or relatives you can rely on are usually the best choice as trustees. Look for a flexible trust where you can add to or change beneficiaries later.

Bear in mind that trusts can be used on most life and pension policies, but not where the life policy is held by a lender. That's because if you die the lender will want to make sure that their loan is paid off, not see the money go somewhere else.

l Index linking. Inflation may be running at little more than 3 per cent a year at present but that does not mean that you can afford to ignore it. A pounds 100,000 policy today would be worth just half that in 25 years - even less if inflation rises above 3 per cent.

Most insurers let you link your sum assured to rises in the Retail Price Index (RPI) but linking to the Average Earnings Index, which rises faster, is a better alternative, according to Allied Dunbar Life's marketing director, Peter Kelly. Most policies link just the sum assured, with premiums rising faster because you are getting older. Some link both sum assured and premium, although these may be more expensive initially.

Options to increase. This is often an alternative to index linking. You can increase your cover by between a quarter and a third if you marry, have (or adopt) a child, move home or on other events such as getting an inheritance. These options have to be taken up quickly, however, in order to avoid having to give any more medical information - valuable if your health has deteriorated since taking out your policy.

Policy reviews. GA Life is one insurer that has made much of the fact that its premiums are competitive and guaranteed to remain unchanged throughout the policy. Allowing the insurer to review premiums, usually every five or 10 years, can mean cheaper premiums early on in the policy than those guaranteed throughout the term. Recently though, the falling threat of Aids has meant customers may benefit from policy reviews.

Waiver of premium. This means the insurer pays your premiums for you if you can no longer do so because of long-term illness or disability. Including a waiver of premium clause usually adds 2-3 per cent to the cost of premiums if you are under 40 and pays up after you have been ill for three to six months. It can be useful because you cannot pay pension premiums if you do not have "pensionable income". Having a waiver of premium clause is also a useful option on mortgage-linked policies where the alternative may be losing your home if you cannot maintain the payments.

Double accident benefit.This pays out twice the sum assured if you die in an accident, but why would your loved ones need twice as much? If you really were at greater risk, the insurer would be unlikely to offer this anyway.

Critical illness rider. Pays if you suffer a critical illness, where survival may cause worse financial problems than dying, especially if you cannot work again. Adding such cover to a life policy can be a cheap way of buying critical illness cover - but a claim cancels your life cover. Colonial's new Serious Illness Plan allows you to buy back your life cover after two years, but you could be left with no continuing life cover and little chance of getting any more. James Bruce, of the Colchester independent financial advisers Corporate & Personal Planning Limited, says that he generally recommends stand-alone critical illness cover, which avoids the problem.

Terminal illness. Pays out if you die within 12 months. Not a pleasant thought, but a valuable addition, sometimes provided free.

Permanent and total disability. It pays out if you can never return to work. You have to be quite poorly before the insurer will pay, however, and some conditions, such as back pain, can be difficult to prove medically.

Investment linking. All life assurance companies invest your premiums and let them build until you become a claim. If you do not claim they may either keep any investment gains to themselves (called a without-profits policy) or else they link the pay-out to their with-profits or unit-linked funds (a with-profits policy). James Bruce is not convinced this is a useful option. "Protection is protection and investment is investment," he cautions.

These are useful points to remember. But Peter Kelly points to the value of professional financial advice and warns that while you never buy a car because of its options, the same should apply to your life cover, too.

Allied Dunbar, 01793 514514; Colonial, 01634 890000; Scottish Widows, 0345 166751; Corporate & Financial Planning, 01206 853888.

The writer is publishing editor of 'HealthCare Insurance Report'.

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