How to assess your life insurance needs

The detail
If you have a standard repayment mortgage paying off both capital and interest over the term of the mortgage, a ‘decreasing term’ life insurance policy worth considering. This option is typically 33% cheaper than a ‘level term’ life assurance policy and the cover amount is designed to decrease as you gradually pay off the debt to your mortgage lender. This policy will therefore often only cover the amount of the mortgage and will not leave you with an additional lump sum once the debt has been repaid.

A level term life insurance policy is often used to protect an interest only mortgage. This policy type is more expensive but has the advantage that the sum asserted stays fixed for the term of the policy and the policy is guaranteed to pay out this sum. This level term option can also be used for a repayment mortgage. Although it is more expensive than the decreasing term option, it does have the advantage that any payout can be expected to not only pay off the mortgage debt, but it might also leave you with an additional lump sum to cover any additional costs or to replace lost income.

Once the mortgage is covered you may choose to take out further policies to protect your family. These policies will usually be either level term policies that provide an agreed lump sum in the event of a payout, or a family income benefit policy, which provides smaller regular payouts to replace a lost income from a family member.

How much?
One of the approximate equations used to calculate a maximum sum assured is 15 times the annual salary. This will often be sufficient to cover the lost income of a money earner within the family. For people closer to retirement, an equation of 10 or even just 5 times the annual salary is often sufficient.

Practicalities
Before you buy life insurance, shop around to find the right policy for your circumstance. The priority must be the most suitable policy at the most competitive price.

If you decide to replace existing cover, make sure the new policy is up and running BEFORE you cancel the old plan. Think carefully about the term of cover – this might be up to retirement or until children are non-dependent, this could be when they are 18, 21 or even mid 20's depending on education plans.

If you have any health or lifestyle risks (existing medical conditions, adverse family medical history, risky hobbies/pursuits) then you will need a specialist broker to help you find the most suitable insurer for your individual risk profile. Comparison sites such as Insurancewide.com will help you identify these.

If you can give up smoking and any tobacco use (including patches) for 12 months, most insurance companies will class you as a non-smoker - this will save you up to 30% on premiums.

Trusts
Consider getting your life insurance policy written ‘in trust’. Otherwise, for example in the case of divorced families, the proceeds could go to the ‘wrong’ dependants or you could lose 40% in inheritance tax. Placing a policy in trust is simple and is usually a free service.

Finally, never withhold information on application forms - any non-disclosure could mean that future claims are not paid. Make sure you know your medical history and give all relevant details to your insurance provider.

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Disclaimer: Tiscali UK is not an insurance intermediary. The information and insurance product(s) found on this page are sourced through Insurancewide.com Services Ltd. Please refer to terms and conditions found at www.insurancewide.co.uk.