Life insurance: Who is it for and how much do you need?

By Kate Saines

Life insurance – like pensions – is something many of us don’t like to think about, particularly if we are young.

After all, it’s not only morbid considering the ‘worst-case scenarios’ we might face, but with so many financial commitments burdening us the thought of forking out for life insurance is not necessarily a priority.

Unfortunately, it’s at those times in our life when we struggle to find extra cash to pay into things like life insurance premiums, when we actually need these products most.

Take starting a family. Having a baby is financially draining, but it’s also the time we need to start thinking about how our family would cope without an income.

A survey by Aviva found “worryingly few” families were taking steps to protect themselves. It revealed 60 per cent did not have life insurance, 85 per cent were without critical illness cover and 90 per cent had no income protection.

Yet, the same survey revealed rising childcare costs were making it worthless, in a number of cases, for both sets of parents in a two-parent family to go to work.

It means many families are being forced to rely on a single income. Lose this income, says Aviva, and you could face real financial difficulty without life insurance to fall back on.

Louise Colley, who is head of protection for Aviva as well as being a mum to four-year-old twins, said: “As care costs rise, it’s quite possible we will see more and more couples relying on one salary while the other person looks after children – simply because they may actually be worse off if both people work.

“However, while this may make financial sense, it can also leave families vulnerable should anything happen to that income earner.”

She added: “Sixty per cent of families do not have even basic life insurance so we’d strongly urge all families to consider the ‘what ifs’ and take steps to make sure they’re covered.”

She warned, without suitable protection we could be leaving our families financially exposed.

So what steps must we take, and when must we take them? Two experts in life insurance have provided guidance on getting the best protection.

When should I buy life insurance?

There is no doubt if you are about to buy a house or start a family you should also be taking out life insurance.

Andrew Coles of independent financial adviser, Beard & Coles, said when you take out a mortgage you will need to consider how your partner would make repayments on their own if you were to pass away. And once your first child arrives protection becomes even more of a priority.

He said: “The average cost of a child per year is £10,000, which is a considerable sum to pay alone should your spouse pass away.”

Meanwhile Neil Baker, an independent financial adviser for Protection & Investment Ltd, reckons taking on other liabilities such as a large loan or business loan are justification for taking out life insurance.

And he thinks that even if you are covered for death in service through your employer, it’s still worth buying personal cover to protect your mortgage just in case you move jobs to a company which does not offer this benefit.

Mr Baker added: “I would say as a single person with no real liabilities, there is no need for life insurance unless you would like to protect your family on your death.”

When will I need to increase my life insurance?

As your circumstances change, you’ll need to review your life insurance to ensure it covers your needs. Having another child, moving to another house, remortgaging or your children becoming independent are reasons to assess your policy.

Mr Coles said: “Life insurance should cover all your current financial commitments and also future financial commitments. You can also use life assurance to pay possible inheritance tax bills on your death.”

Giving up smoking for more than 12 months will also reduce your premiums, so if you have successfully ditched the cigarettes it will be worth speaking to your insurer.

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What type of policy is best for my situation?

You need to choose your life insurance policy according to your circumstances. The single person for whom a traditional life insurance plan is not worthwhile will benefit instead from taking out a critical illness policy, for example.

And even details such as the kind of mortgage you are taking out will dictate the best life insurance plan for you, said Neil Baker. A decreasing term policy, for example, might be best for someone with a repayment mortgage, he explained.

But interest-only borrowers will be better off with a level term assurance policy, which maintains the same amount of cover throughout and will therefore cover the fact the mortgage debt is not reducing.

You also need to consider carefully who in the family will need life insurance, and this in itself will affect the type of cover needed.

For example, many people assume it is the main breadwinner who needs the insurance policy, particularly where one parent works while the other remains at home full-time to care for the children.

This is not the case, according to Neil Baker. He said: “If the stay-at-home parent dies, what happens with the kids? Who will look after them during the day now? Will you all of a sudden need costs for care?

“Will the father want to spend a bit more time at home with the kids, therefore decreasing his work hours and salary?

“These are all possibilities and in this position a family income benefit, which in theory is life insurance, would be a great option."

Mr Baker described these as very cheap policies which made good financial planning.

What premiums should I expect to pay at each life stage?

If you’ve ever taken out any other kind of insurance before, you’ll know the drill on this on - premiums depend on many factors. In life insurance, age, health and gender are major influences on how much you’ll pay.

A level term policy will cost you slightly more than a decreasing term policy. Andrew Coles explained a 30-something single male looking for £100,000 of cover for 30 years would pay between £7 and £7.50 per month for a level term policy. He would pay around £6 per month for a decreasing term insurance plan.

If you are female you will currently pay less, until April 2012, when gender discrimination rules preventing insurers from charging men more than women come into effect.

As you get older, if your health deteriorates, then expect premiums to start rising. Neil Baker said: “If you are a 50-year-old male who is a smoker applying for £100,000 worth of cover for 15 years, you are probably going to pay more than a 25-year-old non-smoking male who is looking for £200,000 of cover for 25 years.”

Where do I find the best life insurance policy?

If you are looking for the best prices on life insurance you can find these on price comparison websites. However, they cannot offer you advice on what protection you need and what will suit you.

Andrew Coles suggests seeking out the services of an independent financial adviser who uses either an extended panel of providers or – even better – covers the whole of the market.

“Avoid bank policies,” he said, “these are generally sold alongside mortgages and are generally a lot more expensive than other policies available.”

Neil Baker echoed this advice. He said: “Far too often I see people with the wrong cover for their needs. When I ask them why they have that level of cover a lot of the time people cannot tell me.”

He added: “We are told we have to insure our car, and it is the law, yet we don’t insure things which are important to us such as our lives and our income.

“Make sure you have reviewed your circumstances so your life and your families are protected.”

Use the Myfinances.co.uk comparison tables to find the best deal on life insurance