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

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