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

If you’ve had a quote for this extra cover already, you’ll know it doesn’t come cheap. But there is a reason why it costs substantially more than standard life cover. All insurance is about risk, the higher the risk of a claim the more expensive the premiums will be. Critical illness insurance insures against the risk of being diagnosed with one of the conditions covered by the policy and the chances of such a diagnosis before age 65 are greater than dieing. So whilst the cost is greater, so is the risk.

But this highlights just how valuable critical illness cover can be if you can afford it. There are many scenarios often used to demostrate how useful this cover can be, but the most obvious is if you are diagnosed with a debilitating illness such as Cancer which means you can no longer work. In this situation, you still need to pay the bills but can no longer maintain your income. Your life cover won’t pay out because you aren’t dead so any dependants you have must share the financial burden too. You might receive some support from your employer and a small contribution from the state but that will only last so long. This is where a critical illness policy can provide a cash lump sum which you can use to pay off all or part of the mortgage or other debts, supplement your income, buy private treatment for your illness or pay for specialist equipment to aid your recovery at home. The money is yours to use how you wish even if you make a full recovery.

Looking at the risk

This might sound a world away right now but it’s worth considering the statistics. It makes for grim reading but 1 in 3 men and 1 in 4 women aged between 40 and 70 will be diagnosed with a critical illness (source Munich Re 2002). But whilst the case for critical illness insurance is strong, it’s all for nothing if your insurer declines your claim when you need it the most.

Critical illness claims in the press

There has been considerable bad press recently which has focused on the number of declined claims for reasons which appear to be technicalities. Quite naturally, this has affected sales of critical illness cover as consumer confidence is undermined by stories of insurers apparently trying to avoid paying out. But when you look a little closer, many of these declined claims have one thing in common - non-disclosure.

Any insurance policy is a contract between you and the insurance company and as part of that contract you must be totally open and honest about your personal and medical circumstances. If you make a claim and the insurer discovers that you have not disclosed part of that information when answering very specific questions on the application, even if it is unrelated to the condition for which you are claiming for, they can and will decline it. And you can’t claim for any illness that you were aware of before you bought the policy, this is another common reason why claims are declined.

So there is no real reason to avoid critical illness insurance based upon the industries claims history, this can be misleading for many reasons. It’s far more important to understand how a critical illness policy could protect you financially and to disclose all information asked for on the application form, even if you don’t consider it to be relevant.

Understand what you are buying

It’s also important to know exactly what you are buying and what it covers you for. Critical illness insurance policies can cover a small number of core conditions or a much wider range on more comprehensive plans and it’s important to read the small print so you understand the terms under which each condition is covered. If you are in any doubt, you should consult and independent financial adviser who will consider your needs and recommend the most suitable policy for you. A national database of advisers is available at www.unbiased.co.uk.

Action steps

1. Do your home work, read the small print and understand excatly what the policy does and doesn’t cover. You can find further informa tion on critical illness cover at the FSA website.
2. Not all policies are the same. Take advice from an (whole of market) independent financial adviser if you are unsure.
3. Choose ‘guaranteed’ premiums if you can afford it.
4. Decide if you need a lump sum or income policy. Income policies are cheaper.
5. Most policies include an additional benefit called ‘total and permanent disability’ which can have two or more claims definitions. The best of these is ‘own occupation’ which means that the cover will pay out if you are totally and permanently disabled and unable to follow your own occupation. It’s easier to prove that you can’t follow your own occupation than ‘any occupation’ or ‘any suited occupation’ which are some of the other common definitions.

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.

Accepting the award for Legal and General life insurance, Gary Burchett said, “To win this title again is a great honour, especially given our track record in this category. We continue to strive for excellence and this award is a reflection of all the hard work that our people have put in to creating better service, better systems and better products.

“The life insurance industry continues to be very competitive and we certainly cannot rest on our laurels. Our strengths lie in offering value for money life insurance products through a broad range of distributors, backed by a commitment to excellent customer service.”

For full details of the awards visit the British Insurance Awards website.

So it’s not only your health that will benefit but also your bank balance. According to price comparison website Moneysupermarket.com, life insurance premiums for non-smokers are about half the price of those for smokers. For example, life insurance of £100,000 for a 35 year old smoker over 25 years would cost £17.90 a month with Norwich Union. A non-smoking male would only pay £10 a month, saving of almost 45% or £2,370 over the term of the policy. A non-smoker with Liverpool Victoria would pay £3,150 less than a smoker for the same cover.

Head of life insurance at moneysupermarket.com, Emma Walker, commented: “The smoking ban inspired 1.2 million smokers to quit by July 1, so if you’re keen to give up, you should find plenty of support from others in the same position. The huge difference in premium levels between a smoker and a non-smoker means there are also considerable savings to be made simply by shopping around for the cheapest deal to suit your circumstances”.

In order to be classed as a non-smoker and qualify for premium savings, most insurers require you to have not used any tobacco products for a full year. Once you have given up for 12 months though, you should go back to your insurer and ask for non-smoker rates.

Most discount brokers only operate online minimising their overheads so they can maximise their discounts and stay competitive in a growing market. So how does a discount broker work and how do you benefit?

Like any broker or middleman, a discount life insurance broker receives a commission for selling an insurers policy. The difference is that a discount broker can sacrifice some or all of their commission when setting up your policy with an insurer to reduce the premium you pay. Some brokers will give up all of their commission and charge you a small fee whereas most will sacrifice the majority but keep say 10% or 20% rebating the remainder to discount your monthly payments. This is totally above board and common practice for most UK insurance companies with the end result being that you get an identical policy for about 20%-30%  less than if you bought direct from the insurer. The savings are even greater if compared to policies sold by banks and building societies.

One point to bear in mind though, discounted premiums are based upon standard rates so if have an extensive medical history or hazardous occupation, the insurance company could still ‘rate’ or increase your premiums. Although any increase will still include your original discount and be lower than if you had bought direct.

The only downside to buying through a discount broker is that most won’t provide you with any advice if you are unsure which policy is best for you. If you are unsure, it’s best to take professional advice from an IFA or other FSA regulated broker.

To find a discount broker simply Google (UK) ‘discount life insurance’ or ‘life insurance quotes’ to find pages of websites offering policies at discounted prices. Again, ensure they are FSA regulated by searching the FSA register.

Some popular discount brokers all directly or indirectly FSA regulated are:

Life Brokers
Life Saver
Life Search

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.

Higher Risk Means Higher Premiums

Insurance companies calculate the cost of your life cover by assessing the risk of your lifestyle. Other factors such as age are also important, but high-risk lifestyle choices such as smoking and being overweight increase your premiums by a significant margin.

This is simply because excess weight is a health hazard—a known cause of health issues such as stroke, heart attack, and diabetes. Overweight and obese people are more likely to experience these health problems and are more likely to die at an early age than people of a healthy weight, and insurers adjust premiums accordingly. If you’re overweight or obese, you can expect to pay anywhere from 50% to a staggering 400% more for your life insurance premiums.

Life Insurance Companies Use the Body Mass Index to Decide who is Overweight

Insurance companies do not use weight alone to determine if you are of a healthy size. Instead, they’ll ask you to disclose your height and weight, and then use this information to determine your Body Mass Index (BMI). If your BMI is outside what they consider normal limits, they may ask you to undergo a medical examination to confirm your health status. This is particularly important because in some cases, people with a higher BMI are not necessarily at risk—someone who is very fit, with a high proportion of muscle, may have a higher BMI because muscle is heavier than fat.

If you’re interested in calculating your own BMI, use the following equation:

1. Multiply your weight in pounds by 703
2. Divide the total by your height in inches
3. Divide the new total by your height in inches again
4. The figure you get is your BMI

The average insurance company considers a normal BMI as between 18.5 and 24.9. Between 25 and 29.9, you are considered overweight, while a BMI of 30 or more puts you in the obese category.

However, it’s important to note that insurance companies also take your age into account when determining how your BMI affects your premiums. Most people do naturally gain a little weight as they age—“middle aged spread” is a fact of life that insurance companies do acknowledge. As you age, the effects of weight on your premiums does reduce slightly, and insurance companies are more likely to be lenient if you’re overweight at 55 than if you’re overweight at 35.

Reduce Your Weight and Reduce your Premiums

All of this means, quite simply, that being overweight will increase the costs of life insurance. However, the reverse is also true. If you’re currently overweight or obese, losing weight and keeping it off will entitle you to apply for a review of your insurance costs. Given the obvious health benefits of losing weight, it’s definitely something to think about.

Mortgage Life Assurance

For most couples or families, a form of mortgage protection that pays the outstanding balance of a mortgage in full is the most desirable option. Choosing this type of mortgage protection ensures that your loved ones will be able to live in your family home and be more financially secure if you die. Mortgage Life Assurance is also known as Decreasing Term Insurance, and with this form of mortgage protection, the amount you are insured for (and the amount that can be claimed) decreases as the balance of your mortgage decreases.

Term Life Insurance

If you’re interested in a plan that offers full mortgage repayment in the event of your death, and perhaps leaves some money over for your family, Term Life Insurance might be your best option. This form of protection is similar to Mortgage Life Assurance, but in this case the amount you are insured for remains the same over the life of the policy.

Mortgage Payment Protection

Also known as Accident, Sickness and Unemployment (ASU) cover, this type of mortgage protection looks good on the surface, but it does have some significant flaws. In the event that an accident or illness prevents you from working, or if you lose your job, ASU cover will pay your mortgage and any other associated costs for up to one year. Note, however, that this type of cover is generic in that it does not take into account your occupation, gender or age, and you will not be covered for any pre-existing illnesses. One advantage of ASU is that you can purchase each type of cover separately—for example, you could purchase unemployment cover only, to supplement another form of mortgage protection that provides better illness and accident cover.

Income Protection

If you prefer a protection plan that offers more than the cost of your mortgage repayments, but prefer to avoid the expense of a plan that pays your mortgage in full, Income Protection may be a suitable option. If you are unable to work due to illness or accident, an Income Protection plan entitles you to a tax-free monthly payment until you are able to work. However, this form of protection does not include coverage if you lose your job. This is one situation where getting the unemployment cover from an ASU plan to supplement your income protection can be beneficial.

Buildings and Contents Insurance

Strictly speaking, this is not a form of mortgage protection; however Building and Contents insurance will protect your home and possessions from theft or loss due to damage or fire. When shopping for this type of insurance it’s crucial to pay attention to the fine print and determine exactly what you’re covered for. Most policies cover theft and fire or flood damage, but individual policies differ in some essential details.