That's life: cover with a deadline

Term assurance will pay off your family's financial commitments - as long as you don't outlive the policy. Tim Collison reports

With so many different types of insurance on the market it's a daunting task to work out which policies you really need. For most people over 30, however, life assurance is essential.

The simplest and cheapest form of life cover is term assurance. The policy pays out a set sum of money if the holder dies within an agreed period (the term) but usually pays nothing if he or she outlives the policy. The most common reasons for taking out term assurance are to protect a mortgage or to provide financial security while children are still at home. There are several different types of contract and you need to make sure the one you buy best suits your needs. The market is flooded with companies offering cover and the careful shopper will find a bargain (see the table above for the best rates).

Because we are living longer, life assurance is becoming less risky for insurers and they have dropped premiums to fight for our business. Don't go with the offer from your bank when you take out a mortgage; its premiums are unlikely to be competitive. Firms with consistently good rates include Marks & Spencer Financial Services, CGU and Scottish Widows.

Most mortgage-related term policies run for 25 years. Those used for family protection are commonly 15 to 20 years. Businesses also take out term policies to cover a key individual, often for five to 10 years.

Insurers differ in their maximum and minimum term lengths. Legal & General has a minimum of one year and a maximum of 60, providing the plan ends before the holder's 80th birthday. M&S starts at three years and goes up to 25.

The old rule of thumb is that you should have 10 times your salary in life cover. You may not need this much: some people have cover at work, which is often linked to a pension and pays out four or five times your salary if you die while employed.

Because there is no investment element with a term policy (which you would find with a whole-of-life scheme or an endowment), insurers base their premiums on three factors: age, health and sex. Premiums go up with age, reflecting the increasing likelihood of the policyholder dying, and rates for women are slightly cheaper because of their greater life expectancy. The most common form of cover is "level term". Premiums and the sum assured are fixed at the outset and a lump sum is paid if the policyholder dies during the term. This type of policy can be bought with an option allowing you to take out another term without the need to provide further medical evidence - useful if your first contract finishes when you are in your 50s.

Family income benefit works on the same basis as level term, but if you die, a regular income is paid to your dependants for the rest of the insured term. The payments can be paid monthly, quarterly or yearly, and premiums are generally cheaper than for lump-sum cover.

For mortgage-related term policies and for those contracts taken out to protect a loan, "decreasing term" policies are common. Here the sum assured reduces by a fixed amount each year, in line with the value of the loan or mortgage repayment. The policy will pay nothing at the end. Only those contracts that are unit-linked - for example, Allied Dunbar's term cover - will pay out when the policy expires, according to the performance of the fund.

An "increasing term" policy, possibly index-linked, will allow you to increase your level of protection as your income rises.

In the main, it is best to keep it simple with term assurance. If you think your circumstances are likely to change, "convertible term" may be for you. This allows you to change the policy to a whole-of-life or endowment plan, again without the need for further evidence of your health. Most convertible policies have a minimum term of 10 years.

For high earners and those nearing retirement, there are tax implications with term assurance. Taking out cover could push you over the inheritance tax threshold (pounds 231,000) in the event of your death, which would require dependants to pay 40 per cent tax on the value of assets over the threshold.

Putting the policy in trust by filling out a simple form will protect it from the taxman. You can also use term cover to protect your assets if you know you are going to exceed the IHT threshold. In the event of your death the policy will cover the value of the tax liability, which your dependants can pay to the Revenue and so free up the remainder of your assets.

While it is sound advice to keep term assurance simple, you could look for a policy that includes critical illness cover, which will pay out a lump sum should you be unable to work .

n Contacts: Term Direct, 0171- 684 8000; CGU, 0500 103103; Marks & Spencer Financial Services, 0800 363422; Scottish Widows, 0345 678910; Legal & General, 0500 336666; Eagle Star Direct, 0800 776666; Equitable Direct, 01296 562000; Scottish Provident and Allied Dunbar, contact your adviser.

n Tim Collison is editor of 'Professional Broking' magazine.

THE BEST RATES FOR INSURANCE

Monthly premiums (pounds ) for pounds 150,000 sum assured for 15 years - non- smokers

MEN WOMEN JOINT LIFE, 1ST DEATH

Age 30 Age 30 Male, 30/female, 27

CGU 9.80 M&SFS* 8.60 CGU 13.43

Scottish Widows 11.25 Equitable Life 8.87 Scottish Widows 14.25

Eagle Star 11.58 Scottish Widows 9.00 Scottish Provident 14.57

Equitable Life 11.98 Eagle Star Direct 9.02 M&SFS* 15.50

Age 40 Age 40 Male, 40/female, 37

CGU 23.65 Scottish Widows 16.50 M&SFS* 30.65

Equitable Life 23.73 M&SFS* 16.55 Scottish Widows 31.65

M&SFS* 23.75 Legal & General 16.80 Legal & General 32.40

Legal & General 24.60 Allied Dunbar* 17.07 Scottish Provident 34.02

*Premiums renewable Source: Term Direct

Start your day with The Independent, sign up for daily news emails
News
Courtney Love has admitted using heroin while pregnant with Frances Bean Cobain, her daughter with Kurt Cobain
people
Sport
Murray celebrates reaching the final
tennis
Arts and Entertainment
'The Archers' has an audience of about five million
radioA growing number of listeners are voicing their discontent; so loudly that even the BBC's director-general seems worried
Life and Style
tech
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Extras
indybest
News
Joel Grey, now 82, won several awards for his role in Cabaret
people
Arts and Entertainment
tv
Arts and Entertainment
Henry VIII played by Damien Lewis
tvReview: Scheming queens-in-waiting, tangled lines of succession and men of lowly birth rising to power – sound familiar?
Sport
Harry Kane celebrates scoring the opening goal for Spurs
footballLive: All the latest transfer news as deadline day looms
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker
Why the league system no longer measures up

League system no longer measures up

Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
Valentine's Day cards: 5 best online card shops

Don't leave it to the petrol station: The best online card shops for Valentine's Day

Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

Devil in blue Costa is a reminder of what Liverpool have lost

The Reds are desperately missing Luis Suarez, says Ian Herbert
Ashley Giles: 'I'll watch England – but not as a fan'

Ashley Giles: 'I'll watch England – but not as a fan'

Former one-day coach says he will ‘observe’ their World Cup games – but ‘won’t be jumping up and down’
Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness