12 things to ask before you buy life insurance

Buy the wrong life insurance policy and disaster could strike. Read our 12 tips to keep you on the right track.

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Buying life insurance doesn't have to be tricky, as long as you know what you're doing. Here are a dozen key questions you should think about to help you find the right protection for you and your family:

1. When do you need life insurance?

If there are people in your life who rely on you financially, then you need life cover. So, that means if you have a mortgage with a partner, or you have children, life insurance is a must. It's also a good idea to get cover if you're a stay-at-home parent.

2. Where you should buy your policy?

There are a lot of companies which sell life insurance. You can even pick up a competitively-priced policy from your supermarket these days along with your bread and milk! But the only way to guarantee you're getting value for money is by comparing quotes. I recommend giving the lovemoney.com life insurance search engine a whirl - and then, if you're really not sure what type of protection you need, speak to a life insurance broker for specialist, tailored advice.

3. When should you apply for cover?

The younger you are when you set up a policy the cheaper it's like to be. So, for example, life insurance is normally cheapest for young people who are in good health.

4. How much protection do you need?

If you want to cover your mortgage, you'll need enough insurance to equal the outstanding debt. You may have other debts which you might want to include as well. If you want to protect your family, think about how much cover you would need to effectively replace your income if you're no longer around. Use this calculator to help you work out the amount of protection you need.

5. How long do you need protection?

You'll need cover in place throughout your mortgage term, which is typically 25 years.  If you're protecting your partner and children, you'll probably want to insure your income until they fly the nest, or until you retire.

6. What kind of policy do you need?

If you want to keep costs down and you have a repayment mortgage, try a decreasing term assurance policy. This is the cheapest type of plan and provides a reducing amount of cover which falls in line with your mortgage as you pay it off. If you want to cover which stays the same throughout, go for a level term assurance policy instead. (If you have an interest-only mortgage, you'll need a level term policy as you're mortgage debt doesn't reduce during the term.)

Similarly, consider Family Income Benefit. This will provide your family with an annual income until a set date, if you die. Again, you'll need to decide whether you want a decreasing term or a level term policy. The premiums on a decreasing term policy will usually be cheaper than on a level term policy, so bear this in mind.

7. How much will it cost?

This depends on a number of factors: 

• your personal circumstances including your age, sex, your health and medical history, and whether you smoke or not
• the type of policy you apply for and the amount of cover you want
• the policy term you choose.

To give you a rough idea, a competitive 20-year level term assurance plan with £100,000 worth of cover, could cost under £7 a month for a healthy woman age 35, and under £8 a month for a healthy man age 35 (based on policies for non-smokers). You'll need to get quotes yourself to find out how much your own premiums would be.

8. Should you choose a joint policy if you have a spouse or partner?

Not necessarily. Joint policies are usually only marginally cheaper than two separate plans. By choosing individual policies, you'll have double the amount of cover for only a small extra cost. With a joint policy, the provider will only pay out for one life - even if both of you die.

9. What might prevent your policy from paying out?

Be careful when you fill out your application form. If you don't disclose all the information you're asked for, or any details are inaccurate, a claim could be invalidated. Most policies also have specific exclusions when the policy won't pay out, so make sure you check all the terms and conditions carefully before you apply.

10. What should you do if your circumstances change?

You should think about updating your policy at certain key stages in your life. Read Eleven reasons why you need more life insurance to find out when extra cover might come in handy.

11. Do you need to write your policy in trust?

Absolutely. Writing your life insurance policy in trust can help protect your family from a huge inheritance tax bill on your death. To find out more, read Escape this inheritance tax trap. Most term assurance policies come with a simple form which you can use to name who you would like to benefit from the proceeds of your policy.

12. And finally, what should you do if you don't need the policy anymore?

Easy. Cancel it. But make sure you really can do without it before you stop paying your premiums.

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*Until 12 June 2009.

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