Why people are dumping life insurance

The continued economic downturn means people have less money to spend on insurance, according to a new report. But this is a dangerous gamble

Sales of whole life insurance in the UK fell 57% between 2007 and 2012, largely because of weak economic growth and falling household incomes, according to a new report.

The total value of these policies fell from £56.5 billion to £24.2 billion, according to the report - Life Insurance in the UK: Key Trends and Opportunities to 2017 - by Timetric.

These policies, which have no term and can pay out on death at any point, have suffered at the hands of the recession as people can no longer afford to pay out for them.

Uncertain economy

Continued weak economic growth, high levels of unemployment and reduced consumer confidence have all been blamed for the fall.

This kind of insurance costs more than the more common 'term' insurance as it can pay out at any point, as opposed to paying out during a set time period, say 40 years. The policyholder pays a monthly sum - a certain amount of the money is invested into life funds, which means the total amount paid out and the monthly fee can change.

The report also predicts that this sector won’t pick up for some time, with premiums only predicted to rise by around 2.5% between 2013 and 2017.

Prolonged low interest rates and regulatory changes have also affected how these policies are sold and their popularity.

Investment and savings

The report also claims that these insurance products are facing increasing competition from the banking and wealth management sector through investments and savings products.

However, for a savings or investment product to become a real alternative, its value would need to be extremely high. For most people that's simply not realistic.

Mark Dampier, spokesperson for Hargreaves Lansdown, also points out that if you have no dependents then relying on an investment vehicle of your savings may be sufficient. But aside from these two scenarios, the need for life insurance policies hasn’t changed.

“Families need to ask themselves some simple questions, should one of us die, or become ill, can we financially carry on? In most cases the answer is no,” he explains.

If you answered no, chances are you need some form of life insurance.

The cost of life insurance

Term insurance premiums have been steadily falling in the past five years, despite a jump when the European Union gender directive came into force.

The price you pay will depend on your individual circumstances. Our life insurance comparison engine lets you compare quotes for different types of life insurance. For example, a 37-year old woman who doesn't smoke and wanted a 15-year policy which paid out £200,000 could pay anything from £8.36 a month, with Beagle Street, to £11.04, with Pru Protect.

The same cover for a smoker would cost slightly more, and LV= would charge £15.10 a month while with Bright Grey it's slightly higher at £16.27.

A joint policy can also be bought, although this will only pay out once on death. The cost here, again for a £200,000 payment and a 15-term policy, is slightly more and there is a poicy for £19.78 with Avivia, or £22.68 with Legal & General.

More on life insurance:

When you should review your life insurance cover

Life insurance: how much do you really need?

When life insurance doesn't pay out

How to pick the right life insurance policy

Life insurance for the over 50s

How-to » Get the right type of life insurance