Think twice before you cancel your life cover

There are three key reasons why cancelling your life insurance policy to save money could be a very big mistake.

Today's economic mess has forced many of us to rethink our budgets. A cutback here and a cutback there seems the best way to make ends meet. But cancelling important life insurance policies to save money could prove a very costly mistake for you and your family.

I think there are three key reasons why stopping your protection - even if you intend to set up a new policy when things get better - could have disastrous financial consequences in the future:

Reason number 1 - protection stops here

Of course, if you cancel your life policy that puts an instant stop on the cover it provided. I know that sounds really obvious, but presumably there was a reason why you took out the policy in the first place. For example, the payout from your policy might be earmarked for providing care for your children if you're no longer around.

Unless your circumstances have changed, that need for protection is still there. So ask yourself how would your family cope if the worst were to happen to you, but they received no financial help?

Reason number 2 - cover will become more costly

If you later decide to apply for a new policy once your financial situation has improved, you may have to pay more for the same level of cover. That's because you're a little older now. And the older you get, the greater the risk you pose to an insurance company, which means the premiums for your policy will be more expensive.

Let's say you cancel your protection policy at the age of 30, and don't reapply for a new policy until you reach 40. The table below gives you a rough idea how much extra a new policy taken out ten years later could set you back:

Protection taken out at 30 versus 40 (most competitive premiums shown)

Premiums are guaranteed to stay the same throughout the term and provide £100,000 worth of cover for a non-smoking male who is in good health. For a 30 year old the term is 25 years. For a 40 year old the term is 15 years. Premiums will vary dependent on individual circumstances.

At the age of 40, a new life cover plan might only cost an extra £2 or so a month. That doesn't sound like a lot, but when you add it up over the term (remember you only need cover for 15 years now as you're ten years older) it runs to a more hefty £459. 

And when it comes to life cover with critical illness, (critical illness cover pays out a lump sum on diagnosis of one of the specified conditions covered under the policy) the extra cost over the term is even more pronounced. This time the total difference over 15 years is huge at almost £2,682.

Of course, the total cost if you don't take protection out until you're 40 will be less than those who start at 30, even with higher premiums. That's because you'll only be paying premiums for 15 years instead of 25. But, I think the total cost is pretty irrelevant given that you'll have a whole decade with absolutely no protection.

Reason number 3 - cover could become too costly

Not only are you a little older but what happens if your lifestyle has changed in the last ten years, or your health has deteriorated? You could find a new policy is a lot more expensive than your original cover was at 30. And there's a risk you may even become uninsurable if your health is significantly worse.

So it makes far more sense to keep the protection you took out when you were young, bright-eyed and bushy-tailed. You may regret cancelling it and reapplying when you're older because you might not have such a clean bill of health. 

If you're relatively young - or you were when you originally took your policy out - the chances are your cover is probably pretty cheap, particularly for life cover only plans. So ask yourself, how much you would realistically save by cutting out the premiums? Is it really worth saving a few pounds each month when you think about the financial troubles which could face you and your family with no cover in place?

Of course, there's nothing wrong with cutting back to save money, especially in a financial crisis. Just make sure you pass on the luxuries and not the necessities.

Compare life cover and life cover with critical illness quotes here.

More: Eleven Reasons Why You Need More Life Cover | A Fool's Guide To Life Insurance