With the price of insurances likely to rise dramatically, Neil Faulkner shares his tips on what to do. The main focus is life insurance, but this applies to all insurances.
In Germany they call health insurance `illness insurance'. That seems to me to be more honest. However, they don't call life insurance `death insurance', which is probably a little bit too harshly direct. But it would make it more obvious what the insurance does. On seeing the phrase `death insurance' you'd have little doubt that this is an insurance that pays out when you die. However, we timidly call it life insurance.
Insurance is a good place to look to trim your expenses. You want to ensure you've got policies that are worthwhile, and that you're not paying for more cover than is necessary considering any risks to you. However, if you have a spouse or children then the value of life insurance cannot be underestimated.
Is it worth the price?
The low price of life insurance that we've seen for the past few years can't survive a recession, in my view. Currently, insurers actually make a loss on life insurance, but have been making up for this loss by cross-selling other insurances and by investing in the stock market. However, as I wrote not too many weeks ago, we can expect devastating results for insurers this year and next, due to a combination of too many insurers competing for business and losses from the plummeting stock market.
Thus, it's best not to wait any longer to buy if you have dependants. I've just looked at prices and found that, whilst they have risen in the past few months, it's just by a few pence per month. You can buy life insurance right now at a fixed-monthly cost of less than £15.
The Fool's life insurance pages suggest you might pay perhaps £19.47 which seemed a bit high to me, so I used the life-insurance comparison tool to re-check prices. A 30-year-old, male, non-smoker who wants his dependants to receive £200,000 tax-free if he dies within the next 20 years can pay just £11.06pm with Legal & General. In fact, half-a-dozen providers charge less than £12pm, including Norwich Union, Axa and Bupa.
As I said at the beginning though, you don't want to buy more cover than you need. We have a calculator to help you work out the amount that you want the insurer to pay to your dependants on your death. This'll help ensure you don't buy too much insurance.
Also, The Fool is still a fan of Family Income Benefit, which is often cheaper. This insurance pays a monthly income to your dependants on your death, instead of a big lump sum up front. Think about this insurance as a possible alternative.
Finally, you might also ponder a more radical suggestion. You could buy `decreasing life insurance'. With this insurance, the sum that your dependants would receive on your death decreases each month. However, you also pay a lower premium. Normally people buy this insurance to cover their shrinking mortgages only. However, as your children get older they'll have fewer years before they'll be supporting themselves, so your spouse and children might not need as large a pot in ten years as they would need if you died tomorrow.
Consider your other insurances, too
It's not just life insurance that'll rise in price, so you want to try to lock in the current price of your other insurances for as long as possible.
I recommend that, even if your policies aren't due for renewal, you should get quotes now for car, home, medical and whatever other insurances that you have. If you can find policies of the same price then you should consider getting out of your old contracts. (Remember to check that you're not losing any valuable benefits by switching. Take advice if you need it.)
If you do decide to switch, you may need a silver tongue to cancel your old contract without a costly admin fee, but I've managed it before. You just need to think of a convincing argument. Good luck!
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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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`Date of publication 04/12/2008.
Articles are checked for accuracy at the time of publication but information will go out of date over time. The levels and bases of, and reliefs from, taxation are subject to change as UK legislation and regulations and the UK tax regime are amended from time to time.