Your Money: Cash in on the Grim Reaper

Insurance: in the fifth part of our series, Jean Eaglesham looks at the variety of life insurance policies available
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The Independent Online
Many thousands of mortgage borrowers could cut their monthly payments just by making a couple of phone calls. The trick lies in switching life insurers.

If you've got a repayment, PEP or pension mortgage your lender will almost certainly have insisted that you have a life insurance policy as well to cover the mortgage in case you die before it is repaid. But you may well be paying more than you need to for that policy.

Life insurance premiums have fallen dramatically in the last three years or so, thanks to increased competition from the likes of Richard Branson's Virgin and the industry's belated recognition that it overreacted to the Aids scare. Borrowers - and anyone else with existing life insurance - can take advantage of these lower rates by switching to a new policy, without any penalty.

The main exception among mortgage borrowers is those with endowment policies, where you'll suffer hefty financial penalties if you switch. With endowments, part of your premium goes to funding life cover, while a large chunk of it is invested to give you a cash lump sum when the policy matures.

By comparison "pure" life insurance policies, which pay out if you die while the policy's in force but give you nothing back otherwise, offer much higher cover for a given monthly outlay - and are easily switchable.

Apart from covering your mortgage, the other main reason for needing life insurance is to protect young children or anyone else financially dependent on you.

Most employers provide some life cover (known cheerfully as "death-in- service benefits"). Nevertheless, many people are under-insured. The key is to work out how big a payout would be needed to replace your income if you died.

"The old rule of thumb that you should have cover for 10 times your income is not far off - ideally you should have a bit more. And you need at least pounds 150,000 to pounds 200,000 to cover a non-working spouse who's looking after very young children," advises Amanda Davidson of London-based independent advisers Holden Meehan. The various policies boil down to:

q Policies that pay a regular income if you die within a set term (family income benefit insurance). This is the cheapest option going for the equivalent cover but not many of these policies get sold, for that very reason. "People aren't sold it because it's cheap and so doesn't pay advisers much commission!" explains Jonathan Fry, of Surrey-based independent adviser Premier Investment Group.

Family income benefit is a good option if you want cover for young children for a set period until they become adults. It pays out a regular income after you die until the end of that set term. If you don't die during the set period, you don't get any money back.

q Policies that pay a lump sum if you die within a set term (term insurance). At its simplest, you pay regular monthly premiums for the term of the policy and, if you die during that period, it pays out a lump sum. If not, it doesn't pay out anything. As well as this "level" term insurance, you can get increasing term insurance, where the amount of cover goes up each year by an agreed amount. You can also buy a joint policy, which pays out if you or your partner dies.

If you're not in an employer's pension scheme and are eligible to take out a personal pension, you can buy term insurance using a pension policy. This option, known as "pension term" insurance is highly tax efficient, since you get tax relief on your premiums at your highest rate of income tax.

There are also two options (renewable and convertible term insurance) that protect against the risk that you may want insurance in future but your health has deteriorated in the meantime. Both allow you to get insurance in future without giving added medical evidence.

q Policies that pay a lump sum whenever you die (whole-life insurance). Not surpris- ingly, this is the most expensive option, since the insurer knows they're going to have to pay out sometime. It's generally worth considering only if you need indefinite financial protection for someone such as, for example, a severely disabled child. Whole-life policies can be complicated. With some, the premium will be reviewed after, say, 10 years and is likely to go up substantially at that point. In other cases, the policy will acquire a cash-in value so you can get some money back if you can't go on paying the premiums. Given such complications, it's generally worth getting independent advice if you're interested in whole-life cover.

q Free guides to life insurance are available from financial advisers Chartwell Investment Management (01225 446556) and Premier Investment Management

(01483 306090).

Next week, we look at critical illness and permanent health insurances, which are often sold as add-ons or alternatives to life insurance.

Jean Eaglesham works for `Investors Chronicle'.

Get a cheaper life - some tips

q If you're thinking of switching policies make sure you are covered by the new one first before cancelling the old.

q Despite the fact that life insurance costs more as you get older, you could still save money by switching. This is because premiums have come down so much recently.

q Using an independent adviser can help cut out much of the legwork in getting a good quote. However, policies from the direct insurers, such as Virgin Direct and Direct Line, aren't generally available through advisers. They can offer very good deals, particularly if you have a healthy lifestyle. Equitable Life also has very cheap premiums but doesn't sell its policies via independent advisers. "Rates vary a lot depending on your circumstances but we can't check for you what the direct insurers are offering. So the best bet is to phone someone like Virgin and then phone someone like us, and compare rates," says Stuart Bayliss, of independent adviser Term Direct.

q You're likely to do better staying put if your health has deteriorated since you took out the policy. The same is true if you've done anything your doctor would frown on during this period, such as putting on a lot of weight, drinking a lot more or starting to smoke. Most life insurers hike their premiums to reflect these risks - premiums for smokers typically cost 30 to 60 per cent more than for non-smokers.

What life costs

Monthly premiums for pounds 100,000 of life cover

Basic life insurance Family income benefit* Whole

"term" (20 years cover) (20 years cover) (life)

Best worst Best worst Best worst

Man aged 40 pounds 25 pounds 43 pounds 20.56 pounds 26 pounds 21.15 pounds 35.16

Woman aged 40 pounds 15.20 pounds 30.80 pounds 13 pounds 17 pounds 15.35 pounds 24.16

*This provides an income of pounds 10,000 a year, rather than a one-off lump sum.

Premiums are for non-smokers

Source: Premier Investment Group