Is life insurance cover affordable in recession?
Can families really afford to keep up life insurance cover through the recession? Or is cover a cost they cannot afford to drop?
Daniel Barnes looks at whether it makes sense to drop life insurance cover if times are tough.
Data from the Association of British Insurers show 13 per cent of people have cancelled their life insurance in the last year to save money.
Life insurance on the face of it seems to be an expense you could do without. When times are tough, and making ends meet is hard, paying out each month to a life company may seem easy to stop.
Life insurance or assurance pays out on your death, most commonly for those with families and seeking to protect them.
Term insurance, or life assurance, covering you for either a set period, is often sold with a mortgage, protecting the lender and your own family in the event of death, and so may not be so easy to drop.
How much protection does your family need?
David McCormack, protection portfolio manager at AXA, explains it may seem easy to just cancel a policy but you need to be aware of the risks of being uncovered.
"You should really be thinking about what is the worst that can happen," he says.
"Because of high levels of debt, people do not have the savings to keep a basic mortgage going. But something from £20 a month could cover that."
Matt Morris, senior policy adviser at life insurance broker LifeSearch, urges people to be very wary about dropping life insurance cover.
"Cancelling a life insurance policy is a drastic move," he says.
"And, of course, you are leaving yourself vulnerable as they will be no payout if something happens."
"It is a short-term issue," says Michael Whyte, chief underwriter for Aviva. "It is looking at your wealth today and if you can guarantee that in the future."
"We urge people to reflect on the decision than make a snap decision. If in future your life changes there is no protection."
Protection or Sky
Life premiums have dropped in recent years as the market has become more competitive, so those looking to cut back with budgets tight could probably find less essential areas to cut back.
"If it is a choice between life insurance and a Sky channel, it should be Sky that goes," Mr Morris said.
"Is it worth saving £10 or £15 a month?" he said, explaining in the case of a financial disaster the effects could be much greater.
Mr McCormack adds: "The cost of life insurance can be the equivalent of a bottle of wine a week from Sainsbury's."
Shop around for cover
For those looking to cut the costs of life insurance, looking for a better deal could be the best tack.
Mr Morris advises people to first think about finding cheaper cover. "First shop around, speak to an independent advisor or look on the internet.
"If you bought through a bank or building society, then you may find cheaper cover," he suggests.
Mr Whyte agrees. "Life insurance is competitive, so it pays to shop around," he says.
It is also worth reviewing your cover to see if you have too much protection.
A change in your job, if you have lost weight or stopped smoking, along with children leaving home could all mean you could need less protection.
"Clients need to be more open and look at protection with an open mind," says Mr McCormack.
As well as changing levels of cover, he adds you can also change lifestyles.
"Your weight or BMI is something you can take control of," he explains, along with stopping smoking - although benefits only appear through lower premiums after 12 months of being smoke free - and reducing the amount your drink.
Figures from Aviva show how smoking makes such a big difference.
A 25-year-old insured after a 30 year term for £125,000 would save over £120 a year by not smoking. Over the life of the life insurance policy the savings can really add up.
However, when shopping round for the best deal, don't be tempted to just go for the cheapest option, as it is important to focus on the cover.
Be careful of a cover gap
It is simple to switch life insurance providers, but policyholders are warned not to cancel cover until new insurance is in the bag.
Mr Whyte warns: "Make sure you do not cancel existing policy before the new one is in place. People have fallen between two stools."
The danger is when people cancel their existing life insurance cover before the new cover is in place. If something occurs they are left with no protection at all as no insurance company has your protection in mind.
Costly life insurance holiday
Mr Morris explains if you do decide to cancel cover with the aim of taking on a new policy a bit further down the line, when your finances have improved, it may prove more expense if your health has deteriorated.
Mr Whyte says: "Your needs are likely to change and the need for cover is likely to change."
The point is life insurance is cheaper when you are younger and healthier.
Applying anew later in life could mean your health has deteriorated and the premiums could rise.
"At 30, when people often first take out a policy, it can be quite cheap. For older people the price goes up," says Mr McCormack.
Figures from Aviva show, without the development of medical conditions, premiums are fairly stable from customers aged 20 to the early 30s.
The most significant impact of age kicks in from late 30s/early 40s and continues as the lives get older.
Based on a healthy male non-smoker with £150,000 worth of cover (level) and 20-year term - from the age of 33 it would take six years for monthly premiums to increase by £5.
But by 40, for premiums to go up by £5 it would take around three years.
Just three years later at 43, it would only take two years off for premiums to rise by £5.
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