Life's greatest question

The answer to this question should govern your entire financial life. Sadly, this answer is extremely elusive!

What does ‘financial security' mean to you? Recently, I asked my wife this question and she immediately replied "owning a home with no mortgage". For me, financial security means being able to weather any storm, no matter how severe.

In other words, my aim is to have enough money put aside to cope with life's setbacks. In this category, I include events such as accidents, illness, unemployment and -- critically -- death.

As I'm now on the wrong side of forty, I estimate that, in all probability, I am already more than halfway through my lifespan. I even checked the life-expectancy figures on the Government Actuary's Department in order to find out. I discovered that a forty-year-old English male can expect to live to 80.1, on average. Thus, I now consider myself to be in the second half of the great game of life!

Then again, the two crucial words in the above paragraph are ‘on average'. As I often remark, ‘averages invite comparisons'. Indeed, although averages can be used to make high-level assumptions, they tell us nothing about the fate of individuals. Thus, even though I know that many men my age will live beyond eighty, I have no idea of my personal destiny.

Of course, life's greatest question (the title of this piece) is "When will I die?" Alas, for most of us, the answer is a mystery. Some people suffering from terminal illnesses can linger for years, while others are abruptly plucked from life at their peak. Still, being aware of our own future mortality is what makes us uniquely human. For other creatures, ignorance is bliss!

Clearly, not knowing when we're going to die makes financial planning even trickier. For example, if you knew that you were going to die before retiring from work, then why waste money on a pension? Likewise, if you knew that you would live to beyond eighty, then you could safely ignore life insurance.

Thanks to individual life expectancy being so uncertain, life insurance is a multi-billion-pound business. Indeed, buying life insurance is one of life's great gambles. If you outlive your policy, then you gain no benefit (other than peace of mind) and all of your premiums go down the drain. On the other hand, if you expire before your policy does, then you get a big payout -- although you won't be around to enjoy it!

So, if you'd like to tip the odds in your favour, then here are five tips to help you get more life insurance for less cash:

1. Go beyond your bank

As always, the golden rule with life insurance is to shop around. Indeed, because policies can last thirty years or more, even a small monthly saving can add up to a tidy sum over decades. So, don't just stroll into your local bank branch for a quote. It's best to shop around online for the best-value cover, using a comparison service such as lovemoney.com's life insurance service.

2. Couples: buy two policies instead of one

Many couples buy one life-insurance policy to cover both partners. These ‘joint life, first death' policies cover two people, but only pay out once (on the first death). Thus, after this payout, the surviving partner no longer has any cover. Furthermore, these joint policies can't be divided up on separation or divorce, which is another problem.

Hence, you might wish to consider buying separate ‘his and hers' policies, as two payouts could be better than one.

3. Don't be worth more dead than alive

You may be tempted to insure yourself up to the hilt in order to give your partner and/or family a bumper payout on your death.

However, I'd urge you to think twice before handing over hefty premiums in return for a Lottery-sized payout. Although many financial advisers suggest insuring yourself for twenty times your salary, I reckon that ten times is enough. Indeed, your goal should be to leave your family in reasonable comfort, not living the high life on the proceeds of your death!

4. Trust in a trust

If you don't take care, then the taxman is waiting patiently to take a slice of your life-insurance payout. Indeed, Inheritance Tax (IHT) can gobble up two-fifths (40%) of your entire estate above £325,000 (or £650,000 for couples). The simple way to avoid IHT is to write your life-insurance policies ‘in trust'. By doing this, the proceeds are paid to your beneficiaries outside of your estate.

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This also speeds up any payout, as you don't have to wait for probate to be obtained.

5. Don't forget housewives and househusbands

A recent survey revealed that it would cost around £25,000 a year to replace the work done by the typical stay-at-home mum or dad. Thus, don't overlook your partner just because s/he doesn't go out to work. By looking after your children and home, s/he provides vital assistance and therefore needs life insurance, too.

Finally, sorry about the morbid nature of this article, but I've been dying to write it for ages...

This is a lovemoney.com classic article, originally published in March 2008 and updated

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