Would your family be able to cope financially without you? Could your spouse or partner afford to pay all the bills on his or her salary alone? And what about your children’s education – you may not be educating them, or planning to educate them, privately but what about if they want to go university?
Death or serious illness is devastating enough for any family to come to terms with without the added stress of having to cope with the loss of a source of income.
Yet many of us fail to address this issue. And even among those who do have life insurance, many do not have enough.
British families are under-insured by £2.5trillion according to research from AXA, an insurance group – meaning a shortfall of £176,776 for the average family or £97,000 for individuals. But it appears as though many are not aware of the fact they do not have adequate cover: More than one in three of those surveyed by AXA believed they were well insured against life risks.
How much cover do you need?
Many people will have death in service benefit provided by their employer and this tends to offer life insurance of four times your salary. However, this may not be enough.
The amount of cover you need will depend on your circumstances but it is advisable to have enough protection to cover your outstanding mortgage at least. If you have children you should also think about the cost of their upbringing and factor that in.
What can you do to protect your loved ones?
Life insurance pays out a lump sum in the event of your death. There are two types of policy available – level-term cover and decreasing-term cover, also known as mortgage life insurance.
Level-term cover pays out a fixed amount should you die during the term of the policy – you will need it if you have a mortgage or large debts, along with dependants. However, couples should be wary of taking out a joint policy that only pays out in the event of the first death. Two separate policies should cost roughly the same price and both will offer payouts.
Decreasing-term cover is often sold in conjunction with a mortgage. As with a level-term policy it pays out if you die during the term of the policy. However, the size of the payout decreases in line with your mortgage. This means that decreasing-term cover is usually cheaper than level-term policies. However, level-term cover is invariably the better option unless you are purposely looking to keep costs down.
What about critical illness cover?
Critical illness (CI) cover pays out a lump sum if you are diagnosed with a life-threatening illness. Medical advances have resulted in many insurers reassessing the conditions covered by CI insurance. Many non-invasive cancers such as certain types of skin cancer, for example, are excluded because better treatment means they are no longer classed as life-threatening.
It is therefore worth checking what is and isn’t covered before purchasing CI insurance as you may decide that it is worth paying a slightly higher premium to get a more comprehensive policy.
Typically, critical illness is much more expensive than life insurance and many firms won’t offer cover to the over 65s – those that do generally have high premiums. However, critical illness cover is available alongside life insurance – the policies are often sold together and it is here that you can make savings.
How much does cover cost?
It’s a common misconception that life insurance and critical illness cover are expensive. They don’t have to be as long as you’re willing to shop around with a comparison tool and not rely solely on the household name providers.
The tables below illustrate how cheap premiums can be if you shop around:
AEGON Scottish Equitable
Legal & General
* Life insurance cover for a male aged 30 years, non-smoker – £97,000 over 25 years. Figures compiled by moneysupermarket.com on March 17 2008.
Provider Monthly Premium* AEGON Scottish Equitable £5.86 Legal & General £6.06 AXA £6.08
AEGON Scottish Equitable
Legal & General
* Life insurance cover for a female aged 35 years, non-smoker – £97,000 over 25 years. Figures compiled by moneysupermarket.com on March 17 2008.
Adding critical illness to a policy will make premiums approximately four times more expensive. The same 30-year-old male could pick up life and critical illness cover for £25.16 per month from AXA, while the cheapest monthly premium for a combined policy for a 30-year-old female is also from AXA at £24.61.
What else should you look for?
There has been an array of Press reports regarding life insurance and critical illness claims being turned down due to policy loopholes.
One of the most common reasons for a claim to be rejected is non-disclosure – it is absolutely vital to be honest with your insurer about your circumstances. This means telling them about any past medical problems, illnesses and operations.
Other things you should consider when comparing life or CI policies include:
- Know exactly what’s covered – Don’t assume that you are covered for all illnesses, check the small print. For example, your critical illness provider may advertise that it covers ‘cancer’ but this will usually mean just a limited range of cancers.
- Total and permanent disability – The Association of British Insurers (ABI) is currently reviewing the definition of ‘total and permanent disability’ due to the subjective way it can be interpreted.
- Always offer full disclosure – Never hide anything from your insurer as this will jeopardise a claim, particularly regarding your medical history.
- Shorter = cheaper – The shorter the term, the cheaper the policy will be. For example you may decide you only need cover until your children finish full-time education or until your partner reaches retirement age. There is no point in paying for more cover than you need.
- Less risk, less to pay – The lower your risk profile, the cheaper your premiums are likely to be. Insurers will take factors such as your age, health, family history and occupation into account when calculating your premium.
- Don’t over-insure – Make sure all debts are covered and that the payout leaves your dependants with a reasonable standard of living. Also check if your workplace offers you a death in service benefit – if it does you can reduce your cover accordingly.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.