Insurers cut cost of term policies

People aiming to protect their families in the event of their own deaths are being offered increasingly cheap term assurance policies, writes Nic Cicutti.

In the past year, the cost of these policies has dropped by 10 per cent or more, as companies compete hard with each other to win a slice of this growing market.

Term assurance is one of the simplest ways of protecting a family or even a business. A policy-holder pays a set premium each month and the policy will pay out an agreed amount on death.

In contrast, under whole- of-life policies, you pay for a package which may include an investment element in the policy. With whole-of-life policies, premiums can rise in line with new risks.

Amanda Davidson, a partner at Holden Meehan, a London firm of financial advisers, said: 'With term assurance you know where you stand. For instance, if there were a new Aids scare, and premiums went up as a result, yours would stay pegged for the length of the contract.

'The disadvantage, apart from the fact it is finite, is that it is very rigid. There is no link with inflation, which means that any payout can fall in value. And if you renew term assurance when it expires, you will have to pay the new rate, which is bound to cost more.

'The best use for a term assurance policy is for people paying off a loan or a mortgage. It is also a very cheap form of cover for young couples.'

The cheapest term assurance for pounds 100,000, on a 30-year- old man over 20 years, would cost pounds 12.44 a month with Prosperity, or pounds 8 for a woman of the same age. Monthly whole-of- life cover from Sun Life would cost pounds 40.02 for a male and pounds 29.84 for a female.

Ms Davidson offers some explanations for the declining cost of term assurance: 'Part of it is that there is mounting competition. But some of it is that companies have found that Aids is not likely to be such a high risk and premiums have been cut across the board accordingly.'

She added that tax relief at the policy-holders' highest rate is available if they have or are eligible for a personal pension. The above premiums could, as a result, be cut by as much as 40 per cent.