Lower The Cost of Your Life Insurance

A life insurance policy pays out a lump sum should you die that can be used to pay off any debts you have, including your mortgage, and provide an income for your family. It’s not the cheeriest of subjects so it’s something that many people avoid. But ensuring you have the right sort of protection in place could be vital for your family’s future.

In this article we’re going to look at term life insurance. This form of life insurance has no investment element related to it and will only pay out during a certain period while you pay your monthly premiums.

Once the term is finished, the policy won’t pay out. Life insurance with investment elements, also known as endowments or with profits, aren’t considered good value these days following a string of own goals and bad publicity. For the vast majority of people, it makes sense to consider life insurance and investment as separate entities.

There is some good news when it comes to term life insurance though. As we’re all living longer, the cost of it has been coming down steadily for years now. So even if you already have a policy in place, it’s worth checking to see if you can get a better deal.

It makes sense to review your life insurance arrangements on a regular basis anyway to make sure the level of cover you have is sufficient. If you’ve recently started a family for example, then you might need additional protection.

Not everyone needs life insurance

There some circumstances where you don’t really need life insurance. If you have no dependents and the value of your home comfortably exceeds your mortgage then life insurance isn’t really worth it. Your mortgage company may try to convince you otherwise of course! Likewise if you have lots of savings and investments, your partner earns a good salary and you have no children, again life insurance is less crucial.

Many people also get life insurance through their employer as a perk. Check to see how much this pays out though, as you may decide it’s insufficient and you need to top it up with your own policy. More on this later.

How much does life insurance cost?

It’s possible to get £100,000 of cover for less than £10 a month these days. How much you’re charged will depend on various factors such as the length of the policy plus your age, sex, health, occupation and whether you smoke. In fact, giving up smoking could easily cut a third or more off your life insurance premiums.

You can either get guaranteed or reviewable premiums. The former is usually more expensive in the beginning as it stays the same for as long as you keep the policy while the latter is re-assessed on a regular basis, usually every five years.

How much cover do you need?

If you’re just taking out a life insurance policy to pay off a mortgage then this is a relatively simple calculation. You can either get a level term policy or a decreasing term one. With the former the amount paid out remains the same while with the latter it decreases in line with the outstanding amount of your mortgage. Decreasing term policies are cheaper but a level term policy could result in a surplus once the mortgage has been paid off.

In most cases though, you’ll want your life insurance policy to pay off not just your mortgage but also any other debts you have and replace the income that you would have earned. There is no right answer here but ten times your salary is a good starting point to consider. If you have a policy through your employer it will probably pay out less than this amount so you may need to supplement it.

If one of you stays at home to look after the kids then they may need some sort of life insurance too. Hiring someone to look children can be expensive as we all know. You’re unlikely to need as much cover as for the main breadwinner in your family however and you might not need the policy to cover the same length of time.

You can get a joint life insurance policy that pays out either or the first or second death. However, these don’t tend to be that much cheaper than buying two separate policies so the latter arguably offers better value for money.

Critical illness

Critical illness policies, which we look at in more detail in a separate article, are often sold alongside life insurance. They pay out a tax –free lump sum if you contract one of a specified list of conditions. Buying a combined critical illness and life insurance policy can often work cheaper than buying two separate polices. However, a combined policy may not cover all the conditions a stand-alone critical illness does and may only pay out once whereas you might get two payments if you had two separate policies.

Avoiding the taxman

Here’s another good trick when it comes to life insurance. It’s quite legitimate to put your policy in a trust for whoever you want the payment to go to. There are two advantages to this. Firstly, the payout does not form of your estate for inheritance tax purposes, which could save tax of up to 40% on the payout depending on what other assets you have. Secondly, your family receive the payment much more quickly than if it is paid into your estate and then has to be sorted out with the rest of your assets.

Setting up a trust is very easy and most insurance companies offer it as an option when you take up your policy in the first place. If you don’t see it mentioned, just ask them about it.

Family income benefit

Getting a large lump sum and deciding how to invest it for the long term can be quite daunting. Some life insurance policies pay out early if you’ve been diagnosed with a terminal illness which can give you time to make any necessary arrangements in this regard.

Another alternative is to get a family income benefit rather than life insurance. As you’ve probably guessed, it pays out a regular tax-free income rather one large lump sum. You can even choose to have it index linked so the amount paid rises each year. Typically, family income benefit will work out cheaper than life insurance because it will only pay out between the time of death and the end of the policy term (this could be your retirement date or when you expect your kids to leave full-time education).