Avoid This Big Financial Mistake

If you need to make cut backs to your budget, cancelling insurance policies to save money is a big risk.

If your budget seems more stretched than usual, you must be thinking about making cut backs. With mortgage costs, food, fuel and energy prices spiralling out of control, making ends meet can be a real challenge.

But, alarmingly, some of us are dealing with thinly-spread finances by cancelling essential monthly payments such as premiums for life insurance policies, critical illness cover and income protection.

The take up of new policies is doing badly too. According to the Association of British Insurers (ABI), sales of protection plans were down almost 17% in the first quarter of the year, compared with the same point in 2007.

Worse still mortgage broker, Mortgage Direct say only one in five new homeowners are taking out life insurance to cover their mortgage debt. This means the vast majority are opting to settle for compulsory buildings insurance only, and skipping other crucial policies.  

But by not insuring your life or your outstanding mortgage loan, you risk leaving your family in dire financial straits, should the worst happen. And cancelling critical illness cover or income protection policies can have major repercussions if you're no longer able to work due to an accident or ill health.

Cut price protection

You may be surprised to hear that for many people, scrimping on protection policies may not actually make much difference to your budget.

Indeed, Fool partner, Moneyfacts.co.uk say the cheapest life insurance policy for a healthy woman aged 35 can with cover of £100,000 is just £6.20* a month. Likewise, for men, the cheapest policy currently on the market comes in at just £7.55 a month. (However, let me stress these are the cheapest deals on offer and not everyone will get these quotes. It depends on your individual circumstances.)

This is a small price to pay for vital protection and should be within the reach of most budgets. So don't make the mistake of neglecting insurance because it may not be as pricey as you think.

Instead, take a look at these top tips for making protection policies more affordable:

Cutting the cost of protection

• Policies which protect your health such as income protection insurance and critical illness cover are usually more expensive than life insurance. In an ideal world you would protect both your life and your health. If you have financial dependants and can only really afford one policy, then life insurance is probably your best bet.** Assuming you're in good health, your premiums should be pretty low and usually provide a reasonably high level of cover. (Of course, if you don't have dependants, then you may not need life insurance and it might be better to focus on income protection insurance.)
• The cost of life cover has fallen dramatically over the last few years. If you already have a policy you may be able to reduce your premiums by switching the plan to a new insurer. Try comparing quotes at The Motley Fool Life Insurance Service.  
• You can also cut the cost of life insurance by opting for cover that reduces over time. If you have a repayment mortgage, get a quote for decreasing term assurance (also known as mortgage protection assurance). Cover under this type of policy falls gradually as your mortgage debt is repaid, which equals cheaper premiums. 
• To protect your family and children, consider a family income benefit policy. This policy usually pays out an income each year from the time of the claim until the end of the policy term. Because the total income which would be paid out reduces each year, premiums are lower than a policy which provides a level amount of cover throughout.
• Re-think `luxury' insurance policies such as private medical insurance (PMI). While private treatment is desirable, it's a secondary need after life insurance.
• In these uncertain economic times redundancy or unemployment cover may seem sensible in the face of a recession. But losing your job won't necessarily have a major effect on your finances if you're able to find new employment quickly at an equivalent salary. If money is tight, this is one policy you may be able to live without.

I can understand why it's tempting to cut back spending on protection policies. But doing so leaves you and your family financially vulnerable. When a basic life insurance policy could cost just a few pounds a month, is it really worth taking the risk?

*For a non-smoker taking out a policy over twenty years. Premium as at 17 June 2008.

**In some circumstances, such as poor health, it may be more important to keep income protection insurance and/ or critical illness cover than life insurance.

More: Be Careful What You Cut | Compare life insurance quotes at The Motley Fool Life Insurance Service.