Buy life insurance while it's still cheap

The bizarrely named life insurance (death insurance would be closer to the truth, albeit rather more morbid) has fallen steeply in price for nearly a decade.

I used to work in the insurance industry and I noticed in the early 2000s that prices had fallen 30%. Association of British Insurers' reports since then have shown a continuing fall in prices, and I've started tracking price falls again myself over the past few years.

In 2008, a 30-year-old male non-smoker who wants his dependants to receive £200,000 of support if he dies in the following 20 years could pay just £11.06 per month for that protection. Last year that fell to £10.05 per month.

Prices fell again by March this year to £9.67 per month and now they're down to £8.88 per month fixed for the life of the policy. That's a fall of 20% inside two years. As far as the policy summaries compare today with last years, the benefits of the cheapest policies haven't been reduced. What's going on?

It's a surprise

Everything keeps getting cheaper. It could simply be that insurers keep finding fewer people claiming due to better medicine, and perhaps our life expectancies have been improving faster than inflation can push up prices and sums insured.

More likely, though, there's more to it than that, because huge competition has had a big effect on prices. I've noticed fewer and fewer insurers competing at these increasingly lower prices over the past two years, which is a sign that it can't stay this way. At some juncture, as always occurs in insurance, there is a turning point in the so-called insurance cycle, when something's gotta give in this competitive industry. Insurers lose too much money and have to raise prices or some even go out of business, reducing competitive pressure.

Some tips

That's just one reason why you want to get a guaranteed premium, where the price is fixed for the life of the policy. If you don't, insurers can raise prices in most years to reflect your increasing age and possibly even to reflect their increasing costs.

The great news is that you're not tied into life insurance policies (not normal ones anyway) so that you can compare and switch whenever you want. Looking at my findings on falling prices and comparing with Association of British Insurers' data, it seems likely that many people who've taken out policies this decade will get a cheaper price if they swap to a new policy, despite being older.

The small print for life insurance is surprisingly simple (as opposed to travel insurance which is surprisingly complex) and there's relatively little variation between policies, but do compare your existing small print before switching.

Prepare now

You can't fight death, but you want to prepare now if you play a valuable role in the family that would cost money to replace, such as looking after children or earning money. As I said at the beginning though, you don't want to buy more cover than you need. There's a life insurance calculator on this website 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.

Consider also a budget version of life insurance called Family Income Benefit. This pays a monthly income to your dependants on your death, instead of a big lump sum up front. Not only is it usually cheaper, but it may help them manage the money better.

Finally, you might consider a possibility that's often overlooked by insurance salespeople. 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.

Therefore, you could buy ‘decreasing life insurance’. With this insurance, the sum that your dependants would receive on your death decreases each month and so you can expect to pay a lower premium. This insurance is usually used by people who want to protect their shrinking mortgages only, and is often called mortgage life insurance. Even so, Legal & General tells me that you don't have to have a mortgage to buy this insurance, although it would certainly make sense to check with the provider before signing on the dotted line.

Don't get the wrong insurance

Life insurance is normally useful to protect your family if you die young. Income protection insurance (aka permanent health insurance), may be more suitable and even more important for many people. Read more about it in Five ways to protect your income and don't confuse it with completely different payment protection insurance. 

Compare quotes through the lovemoney.com life insurance service