MONEY COMMENT
Three Steps To Cheaper Protection

By Cliff D'Arcy
October 4, 2004

Last week, I was giving some advice to a friend who needs life cover.

Recently, my pal discovered that, thanks to a really nasty case of mis-selling, his life insurance policy (which actually turned out to be a ropey mortgage endowment) was almost worthless. He has a wife and child so, naturally, he was worried what would happen to them if he kicked the bucket.

All my chum wants is simple life insurance to cover him and his wife until he retires at age 65, or until his daughter is old enough to fend for herself financially. Here are the three pieces of advice that I gave him:

1. Shop around for lower premiums

Firstly, I suggested that he got several online quotes for term assurance – starting with a visit to our Insurance centre. If you can find the same cover for £20 a month less, it could save you £6,000 over 25 years. Here's an article from June 2003 about my own search for ultra-cheap life cover.

Be warned: if you buy your protection on the high street, your premiums could easily be twice as high as those charged by Best Buy policies!

2. Beware of 'joint life, first death' policies

Most couples buy 'joint life, first death' cover, which pays out a lump sum if either partner dies. However, these policies expire after paying out one lump sum, leaving the surviving partner uninsured.

However, you get much better value for money by buying two separate polices. For a few quid extra each month, you get twice as much cover, because you get two (potential) payouts. In fact, by shopping around for two separate Best Buys, it can be cheaper than buying a joint policy. Weird! Seaprate policies also make life easier when it comes to inheritance tax - and if you separate or divorce, because it's just about impossible to divide up a joint policy!

Learn more in Don't Make The Mistake Of Your Life!

3. Look into family income benefit (FIB)

If you're looking to cover your mortgage, you need to buy a policy that pays out a lump sum if you die, so that your entire debt is paid off. However, if you're protecting your partner or family, you don't need to buy a policy that delivers a lottery-sized payout. After all, how many people have the skill to invest this money wisely to replace the income of a deceased partner or parent? Furthermore, big payouts mean big monthly premiums!

If you want to provide your partner or dependants with an income if you die before collecting your pension, family income benefit (FIB) is a far cheaper alternative to life insurance. Instead of dropping a lump sum in your family's lap, it pays them a tax-free income for a defined period. The savings can be mightily impressive:

A 35-year-old married, non-smoking man decides to insure his life for £300,000 for thirty years (until he reaches 65). The best quote he can find is £28.89 a month. So, over thirty years, he would pay total premiums of £10,400.

He then gets a quote for a thirty-year FIB policy that pays his wife £10,000 a year from the date of his death until his 65th birthday (or should it be deathday?). This is an index-linked payout, so it increases with inflation (rising prices) each year. He is delighted to discover that this policy costs a mere £14.47 a month, or £5,209 over thirty years. That's half the cost of the term assurance policy!

So, if you want to reduce the cost of protecting your family, this is one occasion when FIBbing to your partner is a good idea! Just don't forget to insure your partner, whether s/he works or not.

More: Slash your premiums with a visit to our Insurance centre | Ten Ways To Protect Your Wealth.

Many thanks to Kevin Carr of LifeSearch for providing the FIB quotes.