Seven steps to buying life insurance

Know you need to get life cover, but not sure where to start? Just follow these seven tips...

Let's face it, life insurance is hardly the most thrilling of topics to discuss. But as dull as it might sound, buying life insurance is a necessity if you have dependents such as children, or a partner who relies on you financially. 

Unfortunately, just like most financial things in life, knowing how to go about buying a policy can be tricky. And figuring out exactly what type of cover and how much you need can prove challenging. So I've come up with seven tips to help:

1) Decide how much cover you need

Judging how much life cover you need is one of the biggest obstacles you'll find yourself up against. Unfortunately, it can be very easy to underestimate this - what sounds like a lot of money now, may not work out to be much cover later down the line.

As well as taking your mortgage payments into account, you also need to consider other debts such as household expenses. You need to ensure you have enough cover to provide your family with a reasonable standard of living.

This nifty calculator should help you to work out how much protection you need.

2) Consider how long you need to be covered

You also need to make sure the term of the life policy sufficiently covers the needs of your dependents. If you want to ensure your beneficiaries won't be turfed out of your home when you die, for example, you'll need cover in place throughout your mortgage term, so typically 25 years for new borrowers. And if you have children, you'll probably also need to ensure they have an income until they leave home, or even later.

3) Two single policies may be better than one joint policy

If you're part of a couple, buying a joint policy usually works out cheaper than buying two single policies. But the problem is, it won't give either of you as much cover as two single policies. That's because a joint policy will only pay out once - when one person dies.

On the other hand, two single policies will pay out twice - when each of you dies - so in effect, you're getting double the protection. This is particularly important if you have children.

Although buying single policies can cost more, it shouldn't work out to be too expensive, and is definitely worth checking out.

4) Choose the right type of policy

There are several different types of life insurance plans on the market - which only makes life, and your decision, harder.

The most widely used policy is Level Term Assurance. This plan pays out a cash lump sum to your family (or any other beneficiary you choose) if a claim is made during the term. The sum you're insured for stays the same for the duration of the term.

On the other hand, increasing term assurance provides cover which increases over time to combat the effects of inflation. Although this sounds good, be warned that the premiums will be higher than a level plan due to the cost of inflation-proofing. So you weigh up carefully whether this benefit is worth paying for.

If money is a big concern and you'd prefer to keep the cost of life cover down, you could opt for a decreasing term assurance policy instead. This is cheaper because the cover reduces over the term in line with your outstanding mortgage debt.  This type of policy will always pay out just enough cash to cover the outstanding mortgage whenever you make the claim.

Alternatively, you could think about Family Income Benefit. Instead of paying out a lump sum, this policy pays out an annual or monthly income to your family for a set period (eg it could pay out for twenty years after you die, or pay out every year until your eldest child is 18).

Finally, you could opt for a combination. For example, you could get a level term assurance policy which is set at a level, say, £50,000 above your current mortgage debt, plus a Family Income Benefit policy. This will provide enough cover to your beneficiaries to allow them to pay off your mortgage, plus they would receive at least £50,000 as a lump sum, and they'd also receive your income every year for a set period, as well.

Read Get the right life insurance for you for further tips.

5) Shop around!

As always, before you sign up to anything, make sure you shop around for the best deal. Use the lovemoney.com price comparison service to find a competitive quote.

Don't be tempted to buy your policy from a bank or other mortgage lender because these policies are likely to be more expensive. If you're not sure exactly what type of protection you need, speak to a life insurance broker for specialist advice.

Even if you already have a life policy in place, if you've had it for a fair while, you may find you can now switch to a cheaper deal.

6) Set your policy up in trust

Putting your life insurance policy into a trust will ensure the pay out from your policy goes to the right people when you die. If your policy isn't written in trust it will automatically become part of your estate and this means it will be subject to inheritance tax. But if it is written in trust, it won't form part of your estate and is more likely to be exempt from inheritance tax.

What's more, putting your policy into a trust should also speed up the process of getting the money to your family/beneficiaries. Fail to do this, and the proceeds will become part your estate and won't be able to be distributed until probate is granted.

7) Review your policy regularly

You need to remember to review your life insurance policy and its level of protection every time your circumstances change. For example, if you increase the size of your mortgage, get married or start a family. In all of these situations, additional cover is a good idea.

Read Eleven reasons why you need more life insurance for further information on this.

And finally...

If you don't have any children or a partner (or at least one that doesn't depend on your income), you're unlikely to need life insurance. That said, having some kind of protection is still worth considering. After all, what would happen if you could no longer work due to an illness or accident? How would you manage to pay your mortgage and bills?

For this reason, you should definitely look at taking out critical illness cover and income protection insurance.  You can read more about both of these policies in Why you don't always need life cover.

And if you already have life cover in place, but are thinking of cancelling your policy - be careful. If you later decide to take out a new policy, you may find your premiums are much higher because you're older and your health may have deteriorated. So think twice before you cancel your life cover!

More: Are you a parent? You NEED life insurance! | Beware of cheap life insurance