Take out term assurance to cover the worst-case scenario

There is a simple and cheap solution: take out term assurance. Most are introduced to this type of cover when their first home loan is arranged as providers understandably wish to be assured that the principal advanced, together with any outstanding interest, can be repaid without difficulty.

Term assurance is simply a regular payment in exchange for an agreed payout in the event of death. The sum to be paid and length of time for the policy is down to the individual. It would be wise though to not seek just the amount borrowed for a property purchase but to allow for other bills that may be outstanding and help your family adjust to life without you. If your family or partner depend on your regular income, ensure they can cope financially in the event of your premature death.

The good news is that such protection is relatively cheap and has been falling in price. All payouts are tax-free. The bad news is that if you should survive the length of the policy, there is no benefit paid out.

Policies can be set either on a one-off basis with a single premium paid or over a number of years. Last year there were just 138,000 of the former but 12.7 million of the latter. Overall, the number of term assurance policies increased 7.6 per cent on 2009, says the Association of British Insurers.

Decide at the outset on the basis of your protection:

n guaranteed (where the insurer guarantees both premium and sum to be paid out) or reviewable (where the insurer can alter the premium during the contract);

n level (where the sum to be paid out is fixed) or decreasing (where the payout falls during the contract).

It makes sense to opt for a ‘guaranteed’ policy as you then have the security of knowing the premium regardless of your personal circumstances in the future (such as having a critical illness). Some countries, like Australia, recalculate annually.

Be careful before signing up for a ‘decreasing’ policy as this means it will reduce in line with the principal outstanding on your home loan but other debts and lifestyle commitments may still mean financial problems for your family.

There is though a marked premium advantage by opting for ‘decreasing’. Moneysupermarket has compared guaranteed rates for the Yorkshire Post based on a 39-year-old male non-smoker for £100,000 cover over 25 years. Monthly premiums for ‘level’ cover vary from £10.42 (LV=, formerly Liverpool Victoria) and £10.57 (Aviva) to £10.73 (Legal & General) and £11.80 (Zurich) but for ‘decreasing’ to £7.40 (LV=) and £7.91 (Aviva) to £8.30 (Legal & General) and £8.80 (Aegon/Scottish Equitable).

Life insurance premiums have fallen significantly over the last 15-20 years, driven by improving life expectancy through medical advances and improved socio-economic conditions. Improved technology and competition have also led to efficiencies that have reduced premiums.

As an example, according to Moneyfacts Investment Life & Pensions, the monthly average premium for a 34-year-old male smoker requiring £100,000 cover over 25 years has fallen from £27.39 ten years ago to £17.34 today – a fall of 36.7 per cent. For the non-smoker equivalent, the average rate has dropped from £17.17 to just £9.92 – a reduction of over 42 per cent.

“The cost of life insurance is probably the lowest it has ever been and something most consumers should consider, particularly those with dependants,” said Deepak Jobanputra, Prudential’s actuarial and product director.

He says premiums may now start to rise to reflect the way life insurers are taxed.

Women certainly should take out protection soon as currently they enjoy a significant reduction on premiums. This is because insurers currently take gender into account when setting the price to pay but must disregard such matters by December 21 next year, following a European Court of Justice ruling.

If women take out a guaranteed long-term contact now, the premiums cannot be increased against them. Apart from gender, premiums are based on age, smoker status, medical history, product type (level or decreasing), length of term and size of policy. Occupation is rarely applied but some insurers are experimenting with postal code as a further factor. Age may be banned as part of the criteria if the EU adopts discrimination laws for goods and services.

Usually no medical is required unless you have suffered from a medical condition. Give all such information as, in the event of a claim, an insurer may not pay out if full conditions have not been disclosed.

An experienced independent financial adviser can guide to the best term assurance policy dependent upon such information, which can be difficult to deal with online.

Insurers differ on the maximum age term assurance policies can be started but Bright Grey/Scottish Provident accept up to 79 years which means a five-year contract would then carry through until the person is almost 85.

Independent financial advisers AWD Chase de Vere recommend that couples take out two separate policies rather than one combined one. Whilst there is a small saving with a joint life approach (£20.60 monthly against £26.51 individually for £200,000 cover on a male/female couple aged 40 years over 15 years on standard terms), they secure twice the benefits for just £5.91 extra a month.

There is also a practical point that two single policies can continue if a divorce should take place whilst a joint one would normally be cancelled.

Have the policy written in trust is the tip from Roger Edwards, proposition director at both Bright Grey (which specialises in policies up to £250,000) and Scottish Provident (for sums above this level). This means that the payout does not form part of the individual’s estate, saving potentially on inheritance tax, but ensures the proceeds can be accessed by the beneficiaries much quicker after the policyholder’s death as they do not have to wait for probate.

Term assurance is not expensive. The AA offers it from just £5 a month. Policies can be taken out for 18 to 69-year-olds. It used a panel of underwriters until six months ago but now offers cover through Friends Provident Life. As an incentive, up to £50 M&S vouchers are given when a new policy is taken.