Buying insurance from supermarkets could cost extra £600

Sainsbury's is offering a £50 gift card and double Nectar points with its life insurance, while Tesco also gives out £40 gift cards. But are these just gimmicks?

Many insurers use freebies and giveaways to distract your attention from the overall price of an insurance product.

With this in mind, it's interesting that Sainsbury's Finance has started offering a £50 gift card and double Nectar points for two years with its life insurance. Is this just a gimmick to disguise an expensive product? And how does a rival giveaway from Tesco compare?

The important bit

First, let's put the gimmicks aside for a second and look at exactly what life insurance is - it's a policy that pays out a lump sum, or sometimes an income, to your dependants if you, the policyholder, die during the contract.

A breadwinner might pay a monthly premium for 25 years for a life insurance policy of, say, £300,000. If the breadwinner dies, the named beneficiaries – presumably the spouse and/or children - get the payout to help them pay the bills. Additionally, a homemaker might have a joint or separate policy to pay out a sum of money to help with childcare costs if he or she was to die early.

The insurance payout might stay the same each year – a “level” amount – or it might decrease. My partner and I, for example, have separate decreasing cover (which is usually used to pay off a mortgage but it doesn't have to) lasting 30 years from the start date. This will pay out to the survivor, or our children, a smaller lump sum the later we die, but since each year the children get closer to financial independence, a decreasing amount is sufficient for us.

How Sainsbury's life insurance compares

I looked at the cost of Sainsbury's life insurance for a healthy, 30-year-old, non-smoking male wanting £200,000 of level cover for 20 years. He could pay £10.20 per month, making a total cost over the two decades of £2,448.

Let's say he now spends £300 a month on Sainsbury's food shopping, collecting an extra 14,400 points in store over the two years, thanks to the double Nectar points he gets with the life insurance. This is worth an estimated £72.

The double Nectar points offer doesn't apply to any other Sainsbury's services or to any of the other Nectar partners.

Now add on the £50 gift card and you have £122 of benefits.

At best, then, the £2,448 cost is reduced to £2,326. However, there are three drawbacks to bear in mind:

1) you are very limited in what you can spend your points on, since this isn't a cashback loyalty scheme;

2) you might get better deals elsewhere without the points; and

3) points schemes lead most people to spend more by buying things you otherwise wouldn't have bought. Put these together and you'll realise £122 is a very optimistic estimate of the total benefits.

Shopping around for the best deal

If our 30-year-old male compares life insurance with several other providers, he can reduce his monthly premiums by 16% to £8.79 with Aviva, for example, so he'll pay £2,109 over 20 years. Even taking into account Sainsbury's benefits, he'll be nearly £220 better off with this policy, and in real terms he could probably expect to be better off than Sainsbury's at the very latest in nine years, and probably far sooner.

Overall, the Sainsbury's life insurance deal is far from a rip off, but it doesn't seem like the best bet. However, life insurance is priced based on a number of factors, such as the amount of cover you want and over what period, plus your age, whether you smoke, and often post code, so for a particular profile Sainsbury's could be the cheapest.

If you want both rewards and cheap life insurance, you're likely to be better off using a cashback card (paying off the balance in full each month) when doing all of your shopping, and instead comparing life insurance with several providers to find the cheapest deal, free from promotional gimmicks.

Tesco's worse

As a Tesco shareholder it's painful for me to say it, but its life insurance is even more expensive for our 30-year-old male, costing him £11.59 per month, or £2,782 over the whole 20 years. Even after taking the £40 Tesco gift card into account, he'll still be more than £600 worse off compared to buying through Aviva.

 Hopefully this demonstrates just how important it is to look part the promotional wizardry, and focus on getting the best value for money deal! You can compare life insurance deals over at our life insurance centre.

More: compare life insurance through lovemoney.com | Save your family thousands in taxes | Get £100,000 if you can't work