MONEY COMMENT
Don't Make The Mistake Of Your Life!

By Cliff D'Arcy
August 20, 2003

Earlier this week, we wrote about mortgage life assurance, which is cover that pays off your home loan if you die during the term of the policy. This is essential cover for couples and families because, without it, you could be thrown out of your house if your breadwinner died. In fact, your mortgage lender will usually insist you have mortgage life cover and 'assign' the policy to them, which means they get any payout to clear your debt if you die.

However, if you have a partner or children, you need to think about more than simply paying off your mortgage (what about your other debts, for instance?). In an ideal world, you should have enough cover to replace a breadwinner's entire income if s/he dies. In the real world, cover of ten times your gross income (your salary before deductions) should give you a reasonable standard of living and keep the wolf from the door.

Several widowed Fools have asked me to mention that non-working partners also need cover, as it can cost a widow(er) in full-time work around £20,000 a year to take care of his/her home and family. Don't make the mistake of insuring yourself up to your eyebrows and leaving your partner unprotected.

Most couples take out a 'joint life, first death' policy, which pays out only once and ceases after the first death. So, if two people die together (such as in a serious accident), only one lump sum will be paid. Also, these policies leave your surviving partner uncovered in the future, which could be a problem if s/he still wants cover or has surviving dependants.

I reckon you get far better value for money by buying two individual policies, as these provide twice as much cover (two potential payouts) for a few extra quid a month. What's more, with two separate policies, you can shop around for individual Best Buys (his and hers, usually). This means that, occasionally, it's cheaper to buy your policies separately rather than together. I know this sounds rather weird, but I don't make the rules! In addition, individual policies make inheritance tax planning easier.

Another benefit of having separate policies is if things don't work out and you separate or divorce. Joint life policies are notoriously inflexible: generally, you'd need to cancel the original plan and take out two new ones, which would normally cost you a great deal more (because you'd be older and perhaps less healthy, which means you'd be greater risks). With two separate plans, you each take your own when you part, which is a lot less hassle.

Finally, the cost of life cover has plunged in recent years, which means that you should shop around for cheaper cover to replace your existing policies (known as 're-broking'). In fact, now could be your chance to reduce your monthly premiums and get better protection at the same time!

Example guaranteed monthly premiums (from Cavendish Online, the no-commission broker)

Male and female, both 35-year-old non-smokers, seeking £100,000 of level term assurance over 25 years (I bet these are cheaper than any similar quote you can find - anywhere).

Separate Best Buys: Him £8.40 + Her £7.50 = Total £15.90 | Joint Best Buy: £11.50 - thus, separate policies cost £4.40 a month more for twice as much cover.

So, although it's almost always cheaper to buy a joint life policy, that's because you're getting half as much cover for slightly lower monthly premiums. By all means, have a joint bank account and a joint mortgage, but make sure that joint life cover is right for you, as this is one financial product that's usually best kept separate!

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