Terms of endearment: family's future covered

When does it pay to purchase life insurance to protect your loved ones? Chiara Cavaglieri examines the ins and outs of life cover

Most of us don't want to think what would happen to those we leave behind if the grim reaper suddenly came knocking. But for those who do want to safeguard their loved ones' futures, there is life insurance. Despite the doom-laden headlines of late, life cover costs have fallen by an estimated 40 per cent in five years as a price war has broken out between insurers all keen to top the charts on the price comparison websites.

However, the headline premium rates can be misleading and only those in perfect health are benefiting from the cheapest quotes. "Providers are desperate to get to the top of price comparison sites, but they are subsidising low premiums for those in perfect health by charging those with less than perfect health much more," says Matt Morris from insurance adviser Lifesearch.

Life insurance premiums are based on the probability of the policyholder fulfiling an average life expectancy and any factors that reduce this probability will lead to higher premiums or, on occasion, exclusion. Short-term impacts, on the other hand, such as the outbreak of swine flu, have little effect on premiums because providers assess risk over long periods of time.

"Insurers will look at a variety of factors in setting premiums including age, pre-existing medical conditions and lifestyle," says Jonathan French from the Association of British Insurers. Those with high blood pressure or weight problems, smokers or heavy drinkers will face substantially increased premiums. High-risk jobs and dangerous sports such as diving and parachuting will also make premiums shoot up. But it is important to note that definitions of what constitutes a high-risk job or hobby will vary from one insurer to the next so it is worth getting as many quotes from as many providers as possible.

Life insurance falls into one of two basic types – term assurance and whole-of-life cover – but within these two categories there are many variations. Whole-of-life cover guarantees to pay out a lump sum, irrespective of when the holder dies. Because there is no time limit, premiums are more expensive. With term assurance, however, cover is guaranteed for a limited period of time, typically 10, 15 or 25 years, after which a new policy will have to be taken out. The cheapest and most straightforward option is level term insurance which guarantees to pay out a fixed amount of money upon death for a fixed-rate premium. By paying extra, it is usually possible to include a waiver of premium which covers monthly payments if the policyholder is unable to work due to ill health. Switching policies is relatively simple, but premiums may have gone up because of increased age or new medical conditions. Anyone looking to switch insurers should leave their current policy in place until they are fully covered by the new policy.

When deciding on the level of cover necessary, there are several factors that should be taken into consideration, most notably, childcare costs, university fees, mortgages and other debts, as well as any investments such as pensions. In most cases, it is worthwhile seeking independent financial advice. "We would always recommend that you get some advice and get the adviser to do the work for you," says Emma Walker, head of protection at price comparison site Moneysupermarket. "Some people may decide that their savings and pensions provide enough financial security for their families and they need life insurance only to cover their mortgages. Homeowners on repayment mortgages, for example, can opt for a decreasing term assurance, when the cover and monthly premiums decrease by a fixed amount each year in line with the mortgage debt."

Alternatively, premiums and cover can be set to increase each year to provide protection against inflation. Renewable term assurance is another option that gives the policyholder guaranteed insurability, irrespective of their health, at the end of the term. Some may also want to consider a policy paying a family income benefit which provides a regular, tax-free income rather than a lump sum.

Experts say one of the most important things to do is to write the policy into trust so it does not form part of the holder's estate and incur inheritance tax. It will also allow money to be paid direct to beneficiaries and most insurers include the option to write the policy in trust at no extra charge. Joint life policies for couples may not be a good idea: the surviving partner will be left uninsured when the first partner dies and because premiums increase with age, they are likely to pay much more when looking for new cover.

It is vital to be completely honest and disclose all relevant information when filling in the application forms; companies will refuse to pay out if policyholders mislead them about their health. "It's better to get everything out in the open, even if it means paying a slightly higher premium, to avoid risking them not paying out," says Ms Walker.

Start your day with The Independent, sign up for daily news emails
A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
politicsIs David Cameron trying to prove he's down with the kids?
Dominique Alderweireld, also known as Dodo de Saumure, is the owner of a string of brothels in Belgium
newsPhilip Sweeney gets the inside track on France's trial of the year
Have you tried new the Independent Digital Edition apps?
Cumberbatch was speaking on US television when he made the comment (Getty)
Life and Style
Arts and Entertainment
Tom DeLonge, Travis Barker and Mark Hoppus of Blink-182 pictured in 2011.
musicBassist Mark Hoppus and drummer Travis Barker say Tom Delonge is 'disrespectful and ungrateful'
Arts and Entertainment
Olivia Colman and David Tennant star in 'Broadchurch'
tvBroadchurch series 2, episode 4, review - contains spoilers
cyclingDisgraced cycling star says people will soon forgive his actions
Britain's Prince Philip attends a Garden Party at Buckingham Palace in London
Arts and Entertainment
Ed Sheeran will play three sell-out gigs at Wembley Stadium in July
Lena Dunham posing for an official portrait at Sundance 2015
Arts and Entertainment
Under the skin: Sarah Kane in May 1998
theatreThe story behind a new season of Sarah Kane plays
Arts and Entertainment
Preening: Johnny Depp in 'Mortdecai'
filmMortdecai becomes actor's fifth consecutive box office bomb
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Credit Controller / Customer Service

    £18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

    Guru Careers: In-House / Internal Recruiter

    £25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

    Recruitment Genius: Tax Assistant

    Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

    Day In a Page

    Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

    Auschwitz liberation 70th anniversary

    Woman sent to three Nazi death camps describes surviving gas chamber
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea