Life Insurance

Planning for the worst isn’t the cheeriest of tasks, but arranging cover early can save you money as well as protecting your loved ones should you die.

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Five Point Plan

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Don’t just accept the policy on offer from your mortgage provider – shop around and consider buying a policy independently.

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Always go for ‘back to day one’ cover and avoid any policy that charges an excess.

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Ensure that the policy is portable – ie that you can keep it when you change mortgage lenders as this means you are ‘locked in’ to that policy even if you develop medical conditions.

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People with pre-existing medical conditions and those in employment-sponsored sick-pay schemes may not need accident and sickness cover.

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The self-employed and short-term contract workers don’t need to buy unemployment cover as they can’t be made redundant. Some specialist insurers do offer a specific cover for the self-employed, which offers a similar level of protection to MPPI.

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Life insurance – or assurance, it means the same thing – pays out a lump sum when you die. This can be used to pay off an outstanding mortgage or passed on as part of an inheritance. The two basic types of life insurance are decreasing term insurance and level term insurance.

Each have their advantages and disadvantages, and it makes sense to fully understand each product before you make any decision.

While many policyholders take out insurance to cover their mortgage, this doesn’t mean you have to cover that amount – you can insure any value you like, so long as you can afford the premiums.

Decreasing term
This is the cheapest form of life insurance and it pays out a lump sum if you die within a specified period. If you are still alive at the end of the term, no payment is made.

Term insurance is very flexible and can be taken out to protect most long-term financial needs. For example, you can arrange for a policy to match the repayment term on your mortgage so that if you die before the end of the term the insurance lump sum will clear your mortgage debt. This is usually sold as mortgage term insurance.

Your premiums will stay the same throughout the term of the insurance, but the sum insured decreases in line with your decreasing mortgage debt.If you move house you can generally take the policy with you, but check with your insurer before you do so.

Level term
This is the most basic form of insurance, which pays out a lump sum if you die at any time during the term. For example, if you take out £100,000 worth of cover for a 25-year term and you die after 24 years, the lump sum will be the same as if you had died after one year.

For this reason it is more expensive than decreasing term insurance. If you are alive at the end of the term, no payment is made.

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How to buy life insurance

The cost of your insurance premiums takes into account your age (the younger you are the cheaper the cover), your sex (females pay less), whether you smoke and your medical history. Smokers can pay up to a third more for life insurance than non-smokers – but on the upside, smokers also get better annuity rates when they retire.

You need to be honest about your medical history when you fill in the application form. If you don’t disclose information on the form, you may find that the policy is invalid.

You can take out single life or joint life policies. A joint life policy is often the cheapest way for couples to buy insurance.

You can buy life insurance direct from a provider, through your supermarket, from an adviser or from an online insurance supermarket.

Before you do this you need to work out much cover you need.

You can choose term insurance on premiums alone as the cover is the same on all policies.

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