However, it's very easy to pay £1,000s more than you need to over the life of the policy – even if you get it through a comparison site – due to huge commissions. Therefore, this guide not only takes you through how to work out if life insurance is right for you, but also how to get it the cheapest way.
There are many different types of life insurance: some protect a mortgage and some protect all your dependants, while others provide a way to mitigate inheritance tax. Yet here we're focusing solely on life insurance taken out to provide money for your family if you or your partner were to die. This is something every parent, partner, or person with any other type of dependant needs to consider.
The key product for doing this is called 'level term' Life Insurance or assurance. You insure something that MAY happen, while you assure something that WILL happen. Death is of course assured, but as the question is "will you die within a set time?" many call it Life Insurance, and here's what you need to know.
Level term life insurance pays out a set amount if you die within a fixed term
This is the simplest type of life insurance and the name actually tells you all you need to know...
Level: The payout you get doesn't vary. It's always at a set amount regardless of when you die during the term, eg, £200,000
Term: You only get a payout if you die within a fixed term, eg, 18 years
So all in all the cover guarantees a lump sum payout upon death to your dependants within a fixed time, for example, £200,000 if you die within the next 18 years. Obviously, the more cover you get and the longer the term you want, the more it costs.
It's also worth noting that as the policy only pays out on death – there's usually little dispute over whether someone is dead or not – and it pays a fixed amount, then providing the company is reputable...
Life Insurance just a case of the cheaper the policy, the better.
Don't confuse it with other types of life insurance
This is just one type of life insurance, there are others that do different jobs including:
Mortgage decreasing term Life Insurance: This pays out to cover your mortgage if you die within a set term. As mortgage debt decreases over time, the amount it pays also decreases (it's often called 'decreasing term assurance' because of this).
It's cheaper than level term life assurance as the insurer usually has to pay a lot less. See our Mortgage Life Insurance guide for how to get it. However, if you want to leave a lump sum for your dependants to cover other debts and ongoing spending, a level term life insurance policy, while more expensive, is likely to be a better option.
Whole of Life Insurance: These are often (but not always) investment-linked life insurance policies mainly used to mitigate inheritance tax. In other words, the payout amount should cover the inheritance tax bill on death, and the policy runs out when you die, instead of after a fixed time.
Life insurance investment: These are effectively investments operated through life insurers. While there is a life insurance element they're often things like endowments or with-profits policies and are used far more often in the 'investment' zone rather than for protection if someone dies.
You don't need Life Insurance if you don't have dependants
If you have no dependants and are single, then you'd be right to question why you would bother to get this policy. This is all about paying out when you're gone, so if you've no one you want the money to go to, don't bother.
However, if you do have dependants, such as a partner and/or children or anyone else who relies on your income, then ask yourself: what would happen financially to the people around me if I died?
If the answer is there'd be little financial impact, then you may not need a policy. But if paying the bills, the mortgage, bringing up kids, food shopping and more would be a struggle, this is a cheap way to solve that.
Roughly cover 10 times the annual income of the highest earner till kids have finished full-time education
The rough rule of thumb is to cover 10 times the main breadwinner's income, yet you don't have to stick with that. It may just be a case of do what you can afford – the budget planner should help. Here are some things you should take into account. It should cover...
Any outstanding debts that need to be paid off (including a mortgage if you don't have a separate policy)
Immediate outgoings your dependants would need to pay
Future spending you would have wanted to make, eg, university fees for the kids
Any additional expenses a death may trigger, such as funeral costs
While 10 times your income may seem high, it's worth remembering that inflation will mean the value of this payout is less in, say, 10 years' time than it is now, and you're getting cover to last you that long (or longer if you choose a greater term).
Your dependants don't have to pay any income tax on the payout, but it does count as part of your estate so if your total assets are above the inheritance tax (IHT) threshold, they will have to pay 40% (ouch!) IHT on it. This can be avoided by putting the policy into something called a trust, see below for more info.
How long should the term be?
A policy covering children should last until they are no longer reliant on you, so that's generally at least until they finish full-time education. If you're planning on having more children you may want to estimate when that'd be rather than trying to extend or get a new policy later. This is because cover becomes more expensive the older you get.
To cover a partner it should last until the year you expect to reach pensionable age. Don't feel obliged to cover a round number of years, eg, policies can be for 17 years.
Quick questions:
I've heard that Family Income Benefit may be a cheaper option. Is that right?
Why is 10 times the salary of the highest earner a good rule of thumb?
What is the best age to buy level term Life Insurance?
A colleague told me our employer provides cover. Can I rely on that instead?
I've been offered critical illness cover with my life policy. Should I get it?
Two single policies can be better than joint cover
When buying level term life insurance, you can either get a single policy or a joint couples policy. If both you and your partner are getting life cover, a joint policy may be marginally cheaper than getting two single policies, but it will only pay out once, usually on the first death. You used to be able to get a policy paying out on the second death but they have now become incredibly rare.
A joint policy vs two single policies
Joint policy: The pros
...a joint policy is cheaper than two single policies.
...if you are married but have no dependants it's much less hassle to set up a joint policy compared to two single ones Life Insurance.
Joint policy: The cons
...if you have dependants you will only get one payout, usually on the death of the first policyholder. Single policies, however, pay out twice.
...if you split with your partner you may have to cancel the cover (unless you're still on good terms) and buy two single policies, priced on your new age and health, which will be more expensive Life Insurance.
Two single policies: The pros
...each policy will pay out on the death of each person, rather than just on the first death, which is what happens with a joint policy. So you get two payouts rather than just one Life Insurance.
...if you split with your partner you would not have to buy a new policy.
Two single policies: The cons
...two singles policies are typically more expensive than a joint policy Life Insurance.
...if you are married but don't have dependants you will only need one payout – to your partner. So there is no need for a second payout as there would be no one for it to go to.
THE MONTHLY COST OF TWO SINGLE POLICIES AT £400,000 EACH VS ONE JOINT POLICY AT £400,000
Both 30 years old Both 35 years old
Two single policies One joint policy Two single policies One joint policy
£22.04 £17.06 £30.72 £24.16
All prices are for non-smokers. Figures obtained via Cavendish Online with L&G in February 2018.
The less risk you'll die, the cheaper the cover
https://shortlinks.ooo/The cost of the cover increases with the likelihood of death within the term – age, health, having a risky occupation or being a smoker can increase price. So a 98-year-old tobacco chewing racing driver who likes to go cageless shark diving may struggle to get a good deal, even after reading this.
Pricing radically changes depending on who you are so it's important to disclose everything. However, the rules around disclosure are changing and from August 2016 insurers will be unable to unfairly reject customers' claims if they've given the wrong information about a part of their policy that is irrelevant to their claim (see the news story: New Life Insurance laws will stop insurers wriggling out of claims). But until then...
Disclose everything; all past conditions and any risks. If not, your insurer may use 'non-disclosure' as an excuse not to pay out.
When it comes to pre-existing medical condition, every insurer has its own rules. If you've had issues, it's worth speaking to a broker, who will know which insurers will give you the best rates.
However, what comparison sites don't tell you is they're a taking a huge whack of commission by doing so. But there is a way to slash costs by using a discount broker....
The top discount brokers Life Insurance
Here – as long as you don't get advice – you can buy a policy through them (usually for a fee of £25) and they rebate all the commission they get from the insurer into your policy (so you basically get a discount hence the name discount broker). So, while the fee is a one-off £25, you can save £1,000s over the life of policy. It's an easy win.
Having reviewed the main 10 discount brokers on the market for a range of quotes, here are our top brokers:
Cavendish Online is an online broker with a £25 fee, which rebates all commission. This broker also promises to price match its competitors.
Moneyworld is another online broker (with a £25 fee) and promises to price match its competitors. It also rebates all commission.
Money Minder is also an online broker with slightly higher premiums and a £25 fee, which rebates all commission.
Our suggestion is to always check the top two and then add in the rest if you've time. Remember if you're not sure what you're doing, consider getting advice.
You may wonder why the prices below are slightly different when each rebates all of the commission. It's because each discount broker has a different deal with the insurers and therefore the prices aren't always the same Life Insurance.