Money: Be prepared - and scout around for the best premium

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The Independent Culture
Insurance is never bought, it is sold - at least, so say the experts. Yet for most of us, some form of life cover is a vital necessity. We may need it in conjunction with a mortgage or just to protect our family in the event of our untimely death. But Nic Cicutti asks: why is there such a wide variation in the cost of such protection?

Whenever you take out a home loan, almost the first thing your lender will ask you is if you already have some form of insurance in the event of your death before the mortgage is paid off. In the event of not having any, you are likely to be told to take some out.

The logic behind such a demand is sometimes hard to fathom, particularly if you are single. After all, why take out life insurance if you have no dependants?

The reason is mainly that the lender is insuring itself against the possibility that in the event of your death your estate might not be able to pay off the loan. This could be a problem in cases where the value of your home, if sold, is less than the mortgage.

But the reality is that in most cases taking out life cover is an essential part of financial planning.

Richard Hunter, senior financial planner at Holden Meehan, a firm of independent financial advisers in London, says: "Life cover is a necessity for anyone with dependants and outstanding loans, or commitments that may be outstanding on the premature demise of a person.

"There certainly was a time when we had to sell it but now people are asking for it. Generally, I think people are taking more responsibility for such things than they might have done. My wife, who is a nurse, was the one who told me we had to have it, not the other way round."

The cheapest form of cover is term assurance. Unlike policies that contain an investment element, and can therefore be cashed in, even if you usually get back very little, term assurance is a "plain vanilla" product.

Put simply, you enter into a contract to insure yourself against death for a set number of years. If you continue paying premiums the policy will pay out the agreed sum in the event of your death. Should anything happen one day after the period of cover ends, you (or, more accurately, your dependants) receive nothing - just like car insurance.

Mr Hunter says he prefers term assurance to other investment-linked forms of life cover: "Let's say you had a crisis and needed to get hold of money. If you decide to cash in the life policy then you have no life assurance. I would much rather my clients had life assurance at low cost. That's their cover done and dusted."

Moreover, the cost of taking it out is getting cheaper for most of us, he adds: "Back in the late 1980s, the threat of Aids meant that many life insurance companies pushed up the cost of their premiums. Today, insurers feel they have a handle on the extent of the possible damage and they feel confident that it's not going to be as big an issue."

One striking feature of the market for such policies is that despite the cost of cover coming down, there are massive disparities in the prices charged by different providers.

According to MoneyFacts, the financial statistics providers, for a non- smoker aged 35 next birthday who needs pounds 50,000 worth of cover, premiums range from pounds 6.78 a month from Equitable Life at the cheapest end of the market to Ecclesiastical, which charges pounds 18 a month. Spread over the life of the policy, the difference in charges can be a staggering pounds 2,600.

How can such differences exist when the primary determinant of the cost of cover should be mortality experience for each particular age group?

Richard Hunter believes he has an answer: "What many of these insurance companies do is they go for a niche market. They may say `We want to corner the market in 30 to 35-year olds and we will have the best premiums in the market'. At the same time, they may not be interested in other age groups and price accordingly."

He gives the example of Legal & General, which is among the cheapest in the market for 45-year-olds, charging a premium of pounds 19.89 a month for level term cover of pounds 50,000. Yet for a male non-smoker aged 50 next birthday, the same company charges pounds 37.35, almost pounds 6 a month dearer than one of its rivals, Standard Life, which charges pounds 31.76.

Scottish Amicable, which comes out among the worst in the MoneyFacts league table, confirms that one of the reasons why it may not be competitive is that it has chosen not to be. A spokeswoman adds: "At one time, for example, we were extremely competitive in pension-linked term assurance but not for ordinary term cover." Nevertheless, a firm may still feel the need to offer a quote, even if it realises it will not attract very much business.

ScotAm's reference to pension-linked term assurance raises another question: that of how to cut the cost of premiums. If you have a personal pension, one way of reducing costs is to link payments to the pension.

That way, you receive tax benefits in line with those attaching to the personal pension itself: in other words, for every pounds 77 you pay, the Inland Revenue will add pounds 23 if you are on basic-rate tax or pounds 40 to your pounds 60 if you are on higher-rate tax.

Richard Hunter has another tip: "We always recommend to our clients that they go for policies with guaranteed premiums that will not rise over the term. Other policies may be cheaper at first sight, but if there were a sudden rise in mortality rates five or 10 years down the line, they could leap up dramatically."