According to the Association of British Insurers, more than half of British households have no life insurance—and of those who do invest in some protection, a large number have too little insurance, too much, or are simply paying for the wrong type of life cover. Simply having a policy is no longer enough. There is a large range of options for life insurance, and it’s important to choose life insurance that will meet your current needs and provide adequate protection for your family.

You could be Paying Too Much for the Wrong Cover If…

• You’ve gotten married, had children, taken out or paid off a mortgage, divorced or retired without reviewing your policy
• You haven’t reviewed your policy within the last five years
• You bought any type of life insurance without first determining exactly what type of policy you needed
• You bought the life insurance cover that a salesperson told you was necessary, rather than seeking independent financial advice

Choosing the Right Policy

Choosing life cover that will suit your lifestyle and family circumstances requires some careful consideration before you start shopping for policies. Depending on whether you’re married or divorced, have young children or adult children, are working or retired, your insurance needs are quite different.

Consider the following example. Let’s say you’ve just gotten married, and you and your spouse don’t plan to have children for around ten years. For the first ten years of your married life, the type of insurance you get may very well depend mostly on what you can afford. You won’t need a long term insurance policy, because your insurance needs will change when you start having children. As a young couple with no children, a joint term policy is both cost effective and sufficient for your needs. However, when you have children, you will most likely want to increase the value of your policy, opt for two separate policies rather than a single joint policy, and also consider switching to whole life insurance. When your children become financially independent, you’ll again want to review your cover, and you may find that your insurance needs have reduced at this time.

One important point to note is that it’s better to seek advice from an independent insurance or financial adviser. An independent broker is in a much better position to shop around and find you the best prices, whereas a broker who represents a single provider is unable to provide this benefit—and sometimes they’re more likely to pressure you into choosing a policy that won’t meet your needs. You can find a database of independent financial advisers in the UK at www.unbiased.co.uk.

If you are certain about your life cover needs, you could also consider a discount broker such as Life Saver who will rebate some or all of their commissions to reduce the premiums you pay. Many of these brokers do not offer advice so this option is not suitable if you are unsure which product is right for you.

Insuring yourself for the Right Amount

How much should you cover yourself for? This depends not only on what you can afford, but also on your current lifestyle and expenses. A good rule of thumb is to choose a policy that is worth around ten times your annual income, before tax. However, if you have young children or a mortgage, you may want to consider a higher sum—for example, you might add the value of your mortgage to the sum assured if not already covered by another policy.

Note, however, that depending on your circumstances it may be more prudent to opt for a separate policy to cover your mortgage. If you don’t have much money to spare for insurance, choosing a decreasing term mortgage policy is a good option—this keeps your premiums lower, as the amount you’re insured for decreases as the mortgage is paid.

Action Steps

1. Review your life insurance if you have had a policy for more than five years or if your personal or financial circumstances have changed
2. Take advice from an independent adviser if you are unsure about the type, amount or term of your policy

Statistics released by the Association of British Insurers in 2005 showed that less than 50% of British households have any life insurance at all. Of those who do own a life insurance policy, a similarly staggering number are either under or over insured.

It appears that once reason for this might be that more than a third of those with life insurance do not regularly review their policy to ensure that it continues meets their needs. Just being insured isn’t always enough and it’s important to ensure that your life cover correctly reflects your current lifestyle and family circumstances.

Have your family circumstances changed?

The type and/or amount of cover you need will change over the course of your life as family and lifestyle changes affect your insurance needs. Some of the most common life events that would warrant a review of your life insurance policy are…

• Getting married
• Having children
• Moving home
• Getting divorced
• Retiring

If you get married but plan to wait a few years before starting a family, term life insurance can be a good solution. Term life cover is less expensive than whole life insurance, and it’s even cheaper whilst you are young and healthy. Once children are on the way, it’s a good idea to review your cover with each additional child and to consider increasing your life insurance or perhaps extending the scope of the cover to include more comprehensive options such as critical illness insurance so that your family’s financial needs will be met if you or your partner dies, becomes seriously ill, or is permanently disabled.

Divorce or retirement may reduce or even eliminate your need for life insurance. If you divorce without having had children and have no other dependants, you’ll likely decide you no longer need life insurance at all. If children are involved, you may want to change your beneficiaries to include your children and exclude your former spouse. As you approach retirement, you may decide to include your adult children as beneficiaries, or reduce your total coverage.

Has your lifestyle changed?

The same principle applies when you make lifestyle changes. It’s prudent to review your life insurance if you…

• Start or stop smoking
• Change your level of fitness or health significantly (including blood pressure, weight or cholesterol levels)
• Start or quit a higher-risk job
• Take up or quit a risky hobby

Poor physical health, smoking, a high-risk job or past-time will increase the amount you pay for life insurance but it’s important to declare such changes to your insurer to prevent any claim being invalidated due to non-disclosure. The good news is that if you improve your health or make positive lifestyle changes you can reduce your insurance costs too. For example, if you quit smoking several years ago but you’ve still got the same insurance policy, you’re likely to be paying much more than you need to.

You may also find that a review of your life cover reveals significant savings if you’ve had life insurance for more than five years. Although you are five years older, premium rates on average have reduced over the last five to ten years meaning the same cover could cost less today.

Action steps

1. Digg out your life insurance policy and review the features, terms and conditions of your cover.
2. Decide what cover you need to meet your current financial needs and take advice if you are unsure.
3. If you don’t require advice, go online and compare the cost of your existing cover and any replacement. Consider using a discount life insurance broker.
4. If you do apply for a replacement policy ensure your existing policy stays in force until your new cover is on risk.
5. Don’t forget to cancel your old policy once any new cover has started.

How important is the cost of premiums when you’re shopping for the best life insurance policy? Cost is an important factor, but in some situations it’s better to choose a slightly more expensive option to ensure you’re getting the cover you need. This is particularly true when choosing between a joint life insurance policy for you and your partner, or opting for two separate policies.

Advantages and Disadvantages of Joint Life Cover

For a young couple with little money to spare for life insurance, a joint policy is an attractive option, as both partners can be insured for less than the cost of two separate policies. If one partner dies, the surviving partner will benefit from an insurance payout that can be used to pay the mortgage, additional debts, or simply provide some financial relief by making up for lost income. However, getting a cheap joint life policy does not come without additional costs.

The most significant disadvantage in the long term is that getting joint cover to save on insurance premium costs means that couple ends up with a policy that only pays out once. The surviving partner benefits from the insurance payout, but the policy has now terminated, and they are left uninsured. Depending on how much time elapses between the purchase of the policy and the payout, the surviving spouse may be in their forties or fifties, and be facing much higher premiums if they want to purchase a new insurance policy for themselves.

There are some other problems with joint life cover, too. These typically come into play when one partner earns significantly more than the other, or if one partner is much younger or is in better health than the other partner. Joint life cover insures each partner for the same amount of money, so in the first scenario, one party may not be adequately protected against the loss of income of their partner. In the second scenario, an older partner, or one who is in poorer health, can drive up the total premium costs significantly, to the extent that two separate policies will actually be less expensive.

One more problem with a joint life policy crops up only if the couple separates, so most people tend to overlook this issue. Joint life cover cannot be divided between two separating partners—it’s simply impossible. In these situations, often the only solution is to terminate the policy. This means that not only that any money paid has been essentially wasted, but also that the couple may find premium costs have risen in the meantime due to their age or other factors.

What’s the Best Solution?

In most cases, the most practical way of avoiding these issues is to simply purchase two separate policies. Two policies cost more than one, of course—but you’re getting twice the amount of cover for what usually amounts to just a few extra pounds per month. Both parties can be insured for amounts that will leave their surviving partner with adequate protection, and the premiums for each policy will be calculated independently, so an older partner’s higher rates will not affect the premium cost for the younger partner.