The worst mistake of your life

We all want cheaper life insurance, but scrimping on cover can be a costly mistake.

When it comes to life insurance, Brits are far too focused on the price of the cover. Indeed, according to a new study by Datamonitor, just 11.2% of respondents said they bought their cover based on what the policy offers, instead looking to save a few pennies by going for the cheapest option.

And this can lead to serious problems in the long run

The right life insurance, not the cheapest!

At lovemoney.com, we always encourage you to shop around to get a cheaper deal, whether it’s your mortgage or loan or credit card. And of course it’s a good idea to shop around for a cheaper life insurance deal.

This is particularly true if you've got an existing policy, as premiums have fallen dramatically in recnet years and you may find you can get a new policy at a much cheaper price. Read Switch your life insurance policy quick to find out more.

But bear in mind you have to get the right life insurance for you, not just the cheapest deal you can possibly find. Too many of us are preoccupied with keeping our payments to a minimum, and not checking just how much we are insured for, or what exclusions may apply. According to Datamonitor, this is because we have basically convinced ourselves that life insurance is expensive, so we can only afford to go for the very cheapest deal available, which is simply not true.

And should you die with insufficient insurance in place, it’s your family that will be left to count the cost of your mistake.

So what questions should you be asking yourself if you want to find the right life insurance, not just the cheapest?

Do I actually need life insurance?

The first thing you need to establish is whether you need it at all. If you live on your own in rented accommodation, with no kids or anyone else relying on your income, then you don’t really need life insurance at all. If you've been persuaded to take out a policy unnecessarily, ditch it!

What if you're not sure? A good question to ask yourself is this: “If I’m no longer here, will my loved ones suffer financially as a result?” If the answer is yes, then life insurance is probably a good idea. For more on working out whether you need life insurance, have a read of 5 people who need life cover.

Have I got the right type of life insurance?

Now you’ve established you need life insurance, it’s time to work out whether you've got the right type of policyto meet your needs.

There are two main types of insurance to consider – level term assurance and decreasing term assurance (sometimes called mortgage term assurance).

Level term assurance

It’s all in the name. With level term assurance your loved ones will get a set payment (ie. a level one) so long as you die within a set period (ie. The specified term).

So let’s say you have level term assurance for £150,000 over a 40 year period. That means that whether you die in year one or year 39 of the policy, your loved ones will get a payout of £150,000.

Decreasing term assurance

Once again the name is a clue. Again you will only be covered for a specified term, but this time the payout your receive will decrease over time. So if you die in year one of a 40 year policy your loved ones will get a much larger payout than if you pass away in year 39.

Related how-to guide

Get the right type of life insurance

Get the peace of mind that comes with buying the right life insurance policy at the right price.

See the guide

The reason this is also known as mortgage term assurance is that it is designed to pay off the mortgage should you die. And as your outstanding mortgage balance decreases over time, so will the payout necessary to pay it off. The premiums can be a fair bit lower with decreasing term assurance than level term assurance too.

How much cover do I need?

Once you’ve worked out which type of insurance is best for you, you then need to work out just how much cover you should have.

For me, this is a far more important decision than which type of life insurance you go for. You want to ensure that the payout, no matter when you die, will be enough to cover any outstanding debts, but also that there is enough cash left over to help your family enjoy a comfortable standard of life. It’s great if your payout wipes out the mortgage, but you want to ensure that the absence of your income every month doesn’t leave them worse off.

There’s no easy way to do this, but lovemoney.com has a useful life insurance calculator which you can use as a starting point for working out how much cover you’ll need.

Of course, the less cover you go for, the cheaper your premiums will be. And it can be very tempting to go for the bare minimum. However, this is one area where going cheap is not the best move.

How long do I need life insurance for?

The next question is how long you want the cover for. Again, it can be tempting to go for a shorter term, as it means your premium will be smaller. But that might not be the best move for you or your family.

Recent question on this topic

• DPMoney asks:

  I am in the TA and seem unable to get life assurance at standard rates. Are there any companies who won't discrimante against me?

  • 
    SoftwareBear answered "I guess it's similar to declaring that you have a hobby of hot air ballooning or paragliding ......"
  • 
    DPMoney answered "Thanks SoftwareBear but it is not the same as having a hazardous pastime as that is something you..."
  • Read more answers

How long you want cover for really depends on who the cover is there to provide for. If it’s to help your partner once you’ve gone, it’s generally a good idea to get cover which lasts until they will be at retirement age. And if it’s there to provide for your children, then you should get cover until they finish full-time education.

Don’t lie!

The premium you face won’t just be influenced by the size and term of the life insurance policy you go for – your health will also play a part. Remember, insurers are not that fond of having to actually pay out on their policies, so if you’re pretty healthy (and so less likely to die within the term) then your premiums will be cheaper than if you have a few health problems, or if you smoke.

As a result, it can be tempting to tell a few porkies. Perhaps not tell the full story about a recent hospital trip, or your smoking habits, in the hope it will save you a few pennies on your premium. However, this is a seriously expensive mistake in the long run, as if you die as a result of something linked to the health issue that you weren’t completely honest about, the insurer may refuse to pay out at all as a result of your non-disclosure!

A third way

There is a third life insurance option, in the form of Family Income Benefit, a type of insurance which is very little known, but can work out far cheaper than orthodox forms of life insurance. It’s not for everyone, but be sure to read Save 35% on your life insurance to find out if it’s an option for you.

More: 12 billion reasons to switch your savings account today | Make money by working from home

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