Choosing the right insurance at the right time

Whether it's a life-threatening disease, a road traffic accident or an act of terrorism, no-one knows what life is going to throw their way. But, although it won't stop the bad stuff happening, insurance can ensure you and your family aren't financially affected when the unexpected happens.

Unfortunately, few people can afford to take out cover for all of life's surprises. 'There's no point taking out so much cover you can't afford to live,' says Alan Lakey, partner at independent financial adviser Highclere Financial Services. 'Think about what would happen if you died, or were seriously ill or unable to work, to understand your needs throughout life.'

Although many advocate taking out protection when you're young and healthy and premiums are at their lowest, it's usually the arrival of a son, daughter, partner or even a mortgage that spurs people into action. 'It's about looking after your debts and dependants,' says Tom Baigrie, chief executive of Lifesearch.

'If you've got a mortgage and a couple of kids you'll need to take out protection to ensure that if something unexpected happens to you, the money will be available to clear your debts and look after your family.'

With financial dependants, life assurance is a must. This pays out a lump sum to support your family if you die. The amount you need will depend on your circumstances. Baigrie recommends covering debts such as your mortgage, car loans and credit card bills, then providing additional cover to see your kids through to age 21.

With the mortgage cleared, this additional support will need to cover everything from food and clothes through to childcare and holidays. As a rough guide, LV= estimates that it costs on average £227,266 to raise a child to age 21, but this would increase if, for example, there were school fees to add on.

As well as estimating the amount of cover your family needs, it's also important to check whether you already have life assurance through work. Many employers provide a death-in-service benefit that will pay out a multiple of your salary, typically four or more times, if you die; or you may be able to access cover at a preferential rate.

While this can help, Lakey warns against depending on it. 'It's worth taking out extra life assurance yourself as you can't be certain you'll always be able to rely on the cover provided through work,' he explains.

Cheaper when younger

Indeed, even when you factor in your cover from work, your calculations are likely to leave you needing a significant amount of life assurance. The great thing is that when you're young it's relatively cheap. For example, according to Lifesearch, a 30-year-old taking out £200,000 of life assurance over 25 years would pay just £9.39 a month with Legal & General - less than the price of a latte every Friday morning.

While it may be cheap, there are ways to make life cover even better value. For starters, you might want to consider whether you take a joint life policy. This pays out if either you or your partner dies. It might be suitable if you're covering a mortgage debt, but Craig Palfrey, certified financial planner at Penguin, says it can be worth paying a little extra to take out two separate policies.

'You'd only pay a small amount more for double the cover,' he explains. 'As well as the extra cover, each person gets the reassurance that, if they split up, they wouldn't need to take out a new policy, which could be more expensive to reflect their age and any health problems.'

For example, according to Palfrey, a couple aged 31 and 29 would pay £15.78 a month for a joint life policy giving them £200,000 of cover over 21 years. If they each took out an individual policy for £200,000, these would cost £10.07 and £9.23 respectively, amounting to just £3.52 extra each month for double the cover.

There are alternatives. Rather than take out a policy that pays a lump sum, you might prefer a form of life assurance called family income benefit. This pays out a monthly income until the end of the term, which, as it fits with most household bills and expenses, makes it a lot easier to manage.

Additionally, as the total benefit that can be paid reduces every month, it's cheaper than a lump sum policy. For example, while a 30-year-old would pay £9.39 a month for a lump sum payment of £200,000 of cover over 25 years, if they took out a family income benefit plan paying £10,000 a year over 25 years it would cost £7.67 a month with LV=.

Palfrey says this can save money and ensure cover is tailored to need, but he often finds people prefer to pay the extra for more cover. 'If you were to die in the 20th year of a 25-year policy providing £10,000 a year benefit, it would only pay out a maximum of £60,000. Many people prefer to pay slightly more for a level plan, knowing they'd leave their family a large lump sum.'

Critical illness cover

While life assurance will pay out if you die, as you get older the risks increase that you'll suffer a serious illness such as heart disease or cancer. As this could affect your ability to pay the bills and support your family, critical illness insurance is worth considering.

This pays a lump sum if you suffer one of a list of life-threatening conditions, with many policies also including smaller payments for less severe illnesses. For example, LV='s plan has partial payments including 15 per cent of cover up to £15,000 if you have to go into hospital following an accident, and 12.5 per cent of cover up to £12,500 for partial third-degree burns.

As the probability of a claim is higher, it's more expensive than life assurance. For example, while our couple aged 31 and 29 would pay £15.78 a month for a joint life policy giving £200,000 of cover over 21 years, the same amount of critical illness cover would cost them £73.55 a month. Reassuringly, Lakey says it's not necessary to have as much cover. 'Look at critical illness as buying you options. If you suffer a serious illness you may be able to return to work or retrain and the payout can help with this,' he explains.

Essential insurance cover dos and don'ts

  • Do use your guaranteed insurability options. These allow you to increase cover without further underwriting when life events such as birth, a new job or marriage occur. Whole of life plans even allow you to increase cover if inheritance tax legislation changes.
  • Do look for guaranteed rates - they can be a few per cent more expensive than reviewable rates initially (though some are actually cheaper), but will guarantee you pay the same premium throughout the term.
  • Do review your protection if you stop smoking - you'll qualify for premiums that could be 50 per cent plus cheaper once you're nicotine-free for a year.
  • Do write your life assurance in trust - this ensures it's available quickly and doesn't inadvertently create an IHT problem by falling into your estate.
  • Don't switch critical illness insurance without checking cover first - some older policies will pay out for less severe conditions.
  • Don't take out a joint life policy unless you only want to cover one debt such as a mortgage - two single life policies give you double the cover for a small amount more.
  • Don't touch over-50s plans if you're in good health and happy to complete a medical questionnaire.
  • Don't think it won't happen to you - you're three times more likely to be off work long-term sick than you are to die during your working life.

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