My top five tips for buying life insurance

Getting married, having a baby or just need life insurance? Alison Hunt rounds her top five tips to take into account before you buy.

Life insurance, while depressing, is vital for many. Knowing your family will be taken care of financially should the worst happen can help many of us sleep better at night.

And of course, things change. Maybe you've got married or entered into a civil partnership. You may be starting a family, or adding to the one you've got. And moving to a bigger house of course means a bigger mortgage that needs protecting. So it's worth reviewing your finances every now and again and making sure the amount of cover you have is appropriate for your situation.

There is some good news - life cover can be pretty reasonably priced and premiums are in fact the cheapest they've been for seven years. So check out these tips and make sure you've got the right level of cover for your needs.

1) Know what you already have

First up, in the world of insurance, life cover is relatively cheap. No really. A non-smoking, 30-year old man could get £200k worth of cover for 25 years at just over £15 per month.

But that said he shouldn't be too eager to sign up. A few minutes of research could save him a fortune. Why? Because a large number of employers offer their staff life cover as part of their benefits package.

You may be thrown by the fact it's called "Death in service" cover, but it's essentially the same thing. What's more, as it's usually worth three or four times your annual salary (so if you earn £25k that's £75k - £100k worth of cover) that could be a large chunk (if not all) of the cover you'll need. You may also get terminal illness benefit, critical illness cover and income protection too.

Therefore it's worth finding out what you're entitled to first - it could save you a small fortune.

Just be aware that, should you leave your job, you'll no longer be eligible for this benefit. At that point, if you have any serious pre-existing medical conditions, your cover may be expensive or you may not be able to get cover at all. So you may want to consider topping up your employer's cover with your own, individual policy as well.

2) Single vs joint cover policies

When you start applying for quotes it may seems sensible to get joint cover for you and your partner. It's cheaper and than two single policies and if you and your partner will be each other's beneficiaries, it may seem simpler.

In the long run, however, this is a false economy. While the premiums are cheaper, most joint policies will only pay out upon the first death. So say you should die first, your partner would get the agreed pay out, but would then have no cover of his/her own.

Two single policies are usually only slightly more than one joint one - so it's well worth paying a little extra to cover each life individually.

3) Get enough cover

The next tricky question involves working out how much cover you actually need. While £100k may seem like an awful lot, bear in mind what this money would have to replace.

Do you have a mortgage or other debts (such as credit cards or loans) that would need to be paid off? Are you the main breadwinner? If so, how much would it cost to replace your income?

You also need to work out how long you need to be covered for. As a rule of thumb many people choose to have insurance that will last until their youngest child has finished school or university.

Try plugging your details into this calculator and work out how much cover you may need.

And don't forget to review your cover should you enter a different life stage (such as having a child, buying a new home, stopping working etc).

4) Don't forget the stay-at-home parent

While parents who work (and so bring home an income) tend to automatically consider covering their own lives, it's vital to also cover a parent who stays at home to look after the kids. His or her role is vital, and worth a lot - after all, would you be able to pay the bills and cover childcare, all from one salary?

Indeed, according to the Legal & General (slightly sexist) "Value of a mum" survey, the average value of the work stay-at-home mums (and, I dare say, dads) do around the home (childcare, domestic work etc) equates to just under £33k per year! Yikes! This makes it all the more worrying to realise that over half of all mums have no cover whatsoever.

So work out how much the family would need to cover all that the stay-at-home parent does, and make sure he or she is insured too.

5) Tax planning

With many of us having large mortgages and hefty expenses, this of course boosts the amount of life cover we need. And of course, a whopping amount of cover can add hundreds of thousands to your estate - which of course is subject to Inheritance tax.

Inheritance tax is currently payable at a whopping 40% on everything in your estate over the current threshold of £325k. And of course, with house prices having risen in many areas, this may not seem such a massively large sum to you.

Indeed, when you realise for every £100k of life cover received your dependents could have to fork out £40k to the government, you may decide tax planning is a priority!

Luckily minimising inheritance tax on life insurance is relatively simple. Simply ask to have your life insurance policy written "in trust". It's free and separates the life insurance payout from your estate - protecting it (and your dependents) from the dreaded death tax.

As a final note, of course, make sure you shop around to find a competitive quotation - prices can vary widely even with comparison sites so it's worth spending a little time finding the right one.

Get a competitive life insurance quote at lovemoney.com

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