If your finances are stretched but you need life insurance, try these low-cost alternatives.
Life insurance doesn't have to be as expensive as you think. If you need cover but you're counting the pennies, think about going for a low-cost policy.
When people buy life insurance they often go for a level term assurance policy where you choose how much cover you want and for how long. Typically, you might want to have cover in place until you pay-off your mortgage, your children become financially independent or you retire.
With a level term policy, the amount of cover you have stays exactly the same for the whole term. But this can make the policy more costly. In this article I'll look at two situations -- protecting your mortgage and protecting your family -- where you may be able to save money by going for a different type of plan.
Protecting your mortgage
In this example you need life protection to cover your mortgage. Then your family won't be left to foot the mortgage repayments should the worst happen to you.
But rather than using a level term assurance policy, you could go for a decreasing term assurance plan instead. Decreasing term assurance -- also known as mortgage protection assurance -- can be used to cover the outstanding debt on your repayment mortgage. (These policies can't be used to run alongside an interest-only mortgage where the debt remains constant until the end of the mortgage term.)
As you pay-off a bit of your mortgage every month, the debt you owe your lender gradually reduces. In a similar way, the cover provided by your decreasing term assurance policies also reduces over time. And because the cover is decreasing, the premiums will be cheaper.
Take a look at how much you could save by going for a decreasing term assurance policy:
Decreasing term assurance versus level term assurance
Who is covered? | Cheapest level term premium | Cheapest decreasing term premium | Savings made over the 25 year term |
Male aged 35 | £12.16 | £9.27 | £867 |
Female aged 35 | £9.54 | £7.25 | £687 |
Source: The Motley Fool life insurance search. Premiums are as at 19 August 2008, providing cover of £150,000 over 25 years. Premiums are guaranteed throughout. Assumptions: policyholders are non-smokers and in good health. The actual premiums you pay may be higher depending on your own circumstances.
The difference between the premiums for level and decreasing term assurance may only be a few pounds a month, but over the term this can add up to quite a substantial saving. Plus it's good to know you could get a policy for well under £10 a month if you have a clean bill of health.
Protecting your family
As well as providing cover for your mortgage, it's also sensible to protect your family too. Again people often use a level term assurance policy which on a claim would pay out a lump sum. That would then be used to support the family financially.
But if you think this is too expensive for you, consider a cheaper alternative - the family income benefit plan. It's cheaper because it provides a reducing amount of cover.
Imagine you want to provide your family with an annual income of £20,000 for a 25-year period. As the policy starts, the total amount of cover is £500,000. In other words, if a claim was made straightaway the policy would pay out £20,000 each year for the next 25 years.
But if a claim was made after ten years has passed, then the total amount of cover left would have fallen dramatically to just £300,000 -- that is, £20,000 paid out each year for the remaining 15 years of the term. For this reason a family income benefit policy could be a lot cheaper than a level term plan which provides cover of £500,000 for the whole term.
The difference this makes in the premiums for both types of policy is shown in the following table:
Family income benefit versus level term assurance
Who is covered? | Cheapest level term premium | Cheapest family income benefit premium | Savings made over the25 year term |
Male aged 35 | £34.92 | £18.50 | £4,926 |
Female aged 35 | £26.19 | £14.86 | £3,399 |
Source: lifeassureonline. Premiums are as at 19 August 2008, providing cover of £500,000 over 25 years. Premiums are guaranteed throughout. Assumptions: policyholders are non-smokers and in good health. The actual premiums you pay may be higher depending on your own circumstances.
As you can see, there's a significant difference in the premiums between the two types of policy, with the premiums for a family income benefit policy not far off half of what you would pay for a level term plan. Huge savings can be made over the 25-year term, with men paying almost £5,000 less and women paying £3,400 less by choosing a family income benefit policy.
There's no question that policies which provide reducing cover are certainly effective in cutting the costs of your life insurance. But remember you only get what you pay for. Make sure a decreasing plan still gives all the protection you and your family need.
More: Cut Your Life Insurance Costs by 50%...But Hurry! | Compare quotes at The Motley Fool Life Insurance Centre.
The comments above are the opinions of the author only and do not represent advice specific to your circumstances
This article has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.
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