How to get the cheapest life insurance: tricks of the trade
Choosing the right way to buy life insurance can save you thousands of pounds. We explain how at the bottom of this guide, but first a few other issues…
What to buy
A range of insurance policies will pay some kind of benefit if your health suffers or you are unable to work. You can read about the different types here.
Life insurance is the cover that pays a specified sum if you die. Unlike other health related insurances, there are no criteria that need to be met when the insurer decides if you can claim: you are either dead or you’re not.
That means that the policies on offer are, broadly speaking, the same and that buyers can hunt for the cheapest policy without having to compromise on the standard of cover. However, there are some important points to remember.
You can buy three types of life insurance – level term assurance, decreasing term assurance and whole-of-life insurance.
Level term assurance is taken out for a specified period of time – known as the term. The term is set according to the length of time the customer wants to be covered. They may base this on the period they expect their family to be financially dependent on them, or the term of their mortgage. The lump sum that level term assurance pays out remains the same throughout the term.
For decreasing term assurance the sum the insurance pays will fall over time. This is so that it can be bought in connection with a repayment mortgage where the amount the individual wants to cover gradually reduces in line with the debt. Because of this, decreasing term assurance is usually cheaper than level term assurance.
Whole-of-life insurance pays a guaranteed amount when you die and there is no specified term. However, the premiums for this type of insurance can change. A proportion of the premium you pay is invested and its growth helps keep the premiums low.
However, there have been reports of sharp increases in whole-of-life premiums.
These polices are often used as part of inheritance tax planning and you should consult a financial adviser before buying one.
How much insurance should you get?
Decide what you want the insurance to do. If it is to pay off all debts, including a mortgage, and provide a good standard of living for your dependents you should calculate the cost of these when you buy.
If these potential costs are likely fall over time – the mortgage is repaid and children become financially independent – you could reduce the cost by buying decreasing term assurance.
Think about other costs your insurance might have to cover, for example funeral expenses. It may be that you have other insurance polices or employee benefits that provide if you die. Take these into consideration to reduce the cost of your cover.
Many people already have ‘mortgage term assurance’. Usually, these policies are sold to people when they take out a mortgage. Put simply, it covers the value of the mortgage, but nothing more. If you have it, you can subtract the cost of your mortgage from the amount of life assurance you need to buy.
Use our life insurance calculator to give you an idea of how much you should be taking out.
Get value for money
Some relatively simple measures allow you to greatly improve the value you can get from life cover.
Couples are often offered joint life insurance polices. This means the policy pays the same sum if either of them dies. However, this is only suitable if both parties need the same level of cover.
What’s more, the price of joint cover is often only slightly cheaper, if at all, than two single life policies with the same sum assured for each. Taking out two separate policies instead of a joint policy means that, if the very worst were to happen and both parties died, any dependents would get twice the pay out.
Get you policy written ‘in trust’
Another important step when buying life cover is to ensure it is written ‘in trust’. Put simply, this means that the proceeds from the life insurance policy would fall outside an individuals’ estate when they die, and would therefore not be taken into consideration when calculating inheritance tax.
Writing a policy in trust is relatively simple but does require some form filling. Customers who buy insurance without receiving advice from a regulated adviser are not always made aware of the option of writing the policy in trust.
You can read more about this here. If you are unsure about the best course, it may help to speak to a financial adviser.
Pay less for your cover
Insurers calculate your life insurance premium by using information about your health, age, occupation and lifestyle. So a stunt man with a 50-a-day smoking habit will pay more than a vegan librarian.
Most people will be unwilling to do something as drastic as changing their occupation to get cheaper life insurance, but some may be willing to lose weight or give up smoking.
You have to have given up for at least one year to be classed as a non-smoker but making the effort can can wipe pounds from monthly premiums. And even if you go back to becoming a smoker, your insurance policy should still stand.
How to get the cheapest life insurance policy
Nowadays you can pick up life insurance from the shelves of your local supermarket, as well as through price comparison websites as well as the traditional insurance broker or a financial adviser.
Traditionally, brokers have been a better option than going direct to an insurance company – they help you to compare the cheapest.
Now, a new breed of broker is far cheaper than traditional brokers. Here is why…
• Brokers are paid by commission from the insurance company, typically £700.
• Some of these brokers are willing to give up the commission they recieve in order to make your policy cheaper.
• They spread the commission, say £700, over the monthly premiums on your policy, possibly making it a few pounds cheaper every month. On some policies, this could save you thousands of pounds.
• In exchange, these firms charge a one-off fee, typically £25 or £35, for making the comparison and handing back the commission.
This fee option is great if your situation is uncomplicated and you just want to buy basic term assurance.
Money-minder.com is one such broker. It will hand back ALL the commission to you through the quote – so the monthly premiums should be much cheaper than comparable quotes from usual brokers. In return, you just need to pay the site a fee of £35.
It also has a tool to help you decide if your making the right decision. And if you’re still not happy, you can speak to an adviser on the phone or get one to come to your home – although you’ll then pay higher premiums to pay for the advice.
An example of savings (March 2009)
|Provider||Smoker(monthly)||Smoker(full term)||Non smoker(monthly)||Non smoker(full term)|
|Data based on 35-year-old male on a level term assurance of £300,000 over 20 years|
|Discount brokers used in comparison: Cavendish Online, Life Assurance Online, Moneyworld|
|Aviva – direct||£36.17||£8680.08||£20.18||£4843.20|
|Aviva – through discount brokers||£26.60||£6384.00||£14.90||£3576.00|
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Updated by Gillian Bevis – May 2010
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