Take a long, hard look at your life

Don't pay too much for a life policy - you may not even need it

When it comes to life cover, it seems we are more than a little confused about how much we need and even whether we really need it.

When it comes to life cover, it seems we are more than a little confused about how much we need and even whether we really need it.

Consider, first, these findings. Direct Life and Pensions, the internet-based life insurance provider, is basing its new advertising campaign around the fact that 2 million of us pay too much for life assurance. Online life assurance broker Life-Search has discovered that 60 per cent of homeowners take out life assurance with their mortgage provider despite the fact that they could halve their premiums if they shopped around and bought their cover from another provider.

There is also evidence that the majority of those with life cover are under-insured.

Deciding on the right level of life cover can be complicated. To begin with, not everyone needs it. There is no point in taking out life assurance unless you have dependants. Some people think they need it when they buy a house even if they don't have a partner or children, but this is not the case.

"Those who are taking out a mortgage but have no dependants need critical illness cover and not life cover," says Tom Baigrie, managing director of Life-Search. "You need life insurance to protect your dependants and cover your mortgage should you die."

There are various types of cover available. Very few people should take out "whole life" cover as this tends to be very expensive and is only worth having as part of your inheritance tax planning. Most people only need "term" cover. The type known as "level term" covers you for a lump sum with payments fixed for a certain amount of time. Such cover should incorporate the cost of your mortgage as well as the amount that your dependants would need to live off should anything happen to you.

"Decreasing term" matches the repayment due on a mortgage, and for this reason the amount of cover decreases with the mortgage. This version costs less than level term but doesn't provide the same amount of cover.

"Renewable term" policies are another option for those who can't afford level term cover. These policies are taken out for short periods and can be renewed. However, while the cost may be low initially, the charges will rise considerably as you get older and become a higher risk.

The other option is "family income benefit". This is appropriate for many families, according to Mr Baigrie, though many people know little about the cover. Its advantage over level term cover is that rather than paying a lump sum on someone's death, it pays out a regular tax-free income, a method that widows or widowers may find more useful.

In recent research from Legal & General, the Life Insurance Association (LIMRA) recommended that people should have life cover of 15 times their annual earnings.

Given that the average salary is £20,929, the average amount of life cover required is £313,785. However, Legal & General discovered that the average amount of life cover people have is just £93,000.

While calculating how much cover you need, you should also consider the length of term you require. Your cover needs to last for the term of your mortgage and until your children are no longer financially dependent on you, or until your pension provisions start to kick in. This is likely to be between 20 and 25 years.

If you already have a life assurance policy, it is worth checking whether or not you have got adequate cover. With premiums at an all-time low, you may be able to find a cheaper deal elsewhere.

"Many people don't seem to realise that there are no penalties for getting out of one life insurance policy and reinsuring with another, and now is the time to do so," advises Michael Ward, managing director of insurer Direct Life. "Premiums have come down by about 20 per cent over the past three years and the majority of people will be able to find a cheaper deal."

At the moment, Direct Life is running a "We Bet" offer for anyone who has taken out life insurance since 1 June 1996. The company believes that it will be able to offer all of these people a replacement policy at a lower premium. If it finds it cannot fulfil its pledge, it will pay their premiums for a year. It is also offering a £10 gift voucher with every policy of £125,000 and a £20 voucher to those who take out cover for £250,000 or more. Life-Search also has a price promise - it will match any quote if you find a cheaper one elsewhere.

Before you take out any cover, it is worth getting advice about the level and type of policy you need. Websites such as Life-Search and Direct Life (see Online Oracle, facing page) can ease the task of shopping around for the best deal but are only able to deal with an insurance application and don't offer advice online. Life-Search, however, offers free advice via its call centre.

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