Get Better Protection For Less

Here are two clever tricks to get cheaper protection for your most valuable asset: yourself.

Why is it that we Brits find it so hard to buy life insurance?

Is it that we don't like thinking about life insurance because we prefer not to face up to our own mortality? Or is that we've become complacent, having read so many stories about people living longer? Or have our financial worries become more immediate, thanks to the pressure of ever-bigger bills and record levels of personal debt?

Whatever the reasons, there is a huge gap between the protection which we need and the cover that we actually have. Indeed, according to leading reinsurance company Swiss Re, the UK's "protection gap" is growing every year, because our life cover is failing to keep up with our financial needs.

In 2002, Swiss Re estimated that the protection gap for life insurance was £2 trillion (that's £2,000 billion or £2,000,000,000,000). The company now estimates that this gap has widened to £2.5 trillion, which is an increase of £500 billion in four years.

Ironically, while life insurance is now cheaper than it's ever been, thanks to a price war between providers and lengthening life expectancy, sales of all types of personal protection insurance (life insurance, income protection and critical illness insurance) have fallen for three years in a row. Oops!

Who needs life insurance?

The simple answer is anyone who is a breadwinner: someone whom others rely upon for financial support. So, if you have a spouse, partner or child who counts on you or your income to provide for them, then you need financial protection against death.

How much protection you need depends on your own individual circumstances. In general, you should aim to cover two-thirds of your earnings (or around £20,000 if you don't work but provide care to children or dependent adults). For most people, around thirteen times their annual salary should be a comfortable cushion. Your cover should last until your children are old enough to fend for themselves (age 20?), or until you reach your expected retirement age, say, 60.

According to Kevin Carr, protection guru at LifeSearch, another useful rule of thumb is that you should have at least £150,000 of cover per dependent child. Thus, with two children, I need to insure my life for at least £300,000, which means that I have a personal protection gap of my own to fill. Oops again!

Anyway, here are two tricks to get better value-for-money cover today:

1. Buy Family Income Benefit (FIB). As I explained in this article, instead of paying out a lump sum, FIB pays a tax-free monthly income to your dependants, making it much cheaper than traditional life insurance. Usually, monthly premiums for FIB are a third lower than those for level term insurance.

2. Buy two separate policies. Instead of buying a "joint life, first death" policy which covers two adults but only produces one payout, buy separate "his and hers" policies instead. By doing this, you only pay a few pounds more each month, but you get two payouts if both people die; you don't leave one partner short of cover after the other dies; and your policies are easier to divide up if you separate or divorce. This advice also applies to same-sex couples.

Finally, learn how to choose life insurance wisely by reading Oops, You Bought The Wrong Protection and More Buying Blunders To Beware Of. Also, remember that one of the few certainties in life is that everyone dies -- the only question is when. To be counted as responsible adults, we must take steps to diminish death's financial impact on our loved ones, if nothing else.

More: Use the Fool to compare life insurance.