Ensuring that there is money in the pot

In the second of a series of articles on how you can create your own personal welfare state, we look at the savings to be made on life assurance.

INSURERS DO not always have a reputation for passing on cost savings to their customers, but basic life assurance has become something of a buyers' market in recent times. It now costs less than it did before anyone had heard of Aids in the early Eighties.

In fact, if prices continue falling at their current levels, insurers could, within 15 years, be in the position of paying you to take out a policy. Or so suggests Swiss Re, a company which specialises in sharing risks with insurers, and which regularly monitors trends in term assurance pricing.

That partly reflects the fact that we are now living longer. Figures just released by the Institute and Faculty of Actuaries show that, on average, a man of 30 can expect to live to the age of 79 and three months, almost five-and-a-half years longer than a man of the same age could expect in 1960.

A woman aged 30 will live even longer - to 84 years and four months. Of course, if you are a smoker, the news is not so good. Women smokers on average can expect to live seven years less, male smokers for five- and-a-half years less.

Not everyone needs life assurance. If you have no dependants, you probably have no need for it, though if you borrow money, the lender may insist that you have enough to pay off their loan if you die.

As you get older, moreover, the need for life assurance also largely falls away, unless, that is, your estate exceeds pounds 223,000 and you do not want your beneficiaries to have to cash in investments or sell your home in order to pay any inheritance tax (IHT).

The tax kicks in at pounds 223,000 at a stinging 40 per cent and is payable on your whole estate, including your home and on any assets given away up to seven years before your death.

Many people simply want to ensure that in the event of their death, their partner and any children are well protected financially while they are still financially dependent. The cheapest way to do that is with a term assurance policy.

The reason it is so cheap - a woman aged 30 could pay just pounds 6.12 a month to get pounds 100,000 cover for 15 years, a man of 30, pounds 8.18 a month - is that it only pays out if you die during the policy term. As you are unlikely to die until well into retirement, the policy is likely to expire before you do.

The flip side is that if you do not die before the term, neither you nor your estate gets anything back. To help improve those odds, you could instead have a renewable policy. This usually lasts for 10 years and at the end of the term you effectively start again. As you are older it will cost more then, and a little more initially too, as the life company could be taking on a much longer-term risk.

A convertible policy allows you to convert to another type of policy, usually a whole of life policy which, as its name suggests, lasts just as long as you do. You can also have a policy that is both renewable and convertible.

Basic term, renewable term or convertible term are likely to have a fixed sum assured or one that goes up each year, usually in line with average prices or earnings. The earnings link is best, as earnings tend to outstrip prices over the long run.

If you are looking to reduce costs and your need for life assurance is likely to fall away over the years, you could look at a policy where the sum assured goes down each year.

That is not as strange as it sounds. If you are buying a house or flat and have a repayment mortgage, for example, the amount owed will fall each year as you slowly repay the capital borrowed. A mortgage protection policy is designed to go down by a roughly similar amount so that you do not have to pay for more cover than you need.

Family income benefit plans takes a different approach. Instead of paying a single large lump sum on your death, this pays a smaller amount every year until the end of the term. A policy paying pounds 10,000 a year for 20 years could pay out pounds 200,000 if you died in the first year but it would cost considerably less than a policy with a level pounds 200,000 sum assured.

However, if you died after, say, 18 years, it would only pay out two payments of pounds 10,000. This type of plan is most useful if you have young children who are likely to be financially dependent on you until they start work.

The final consideration when deciding which type of term assurance is best for you is whether you want guaranteed rates or reviewable rates. On a reviewable policy, the life company will periodically - usually every five years or so - compare its actual experience with the assumptions it made at the start.

If we go on living longer, you could find that at review you are offered more cover or a lower premium. If it goes the other way and life expectancy goes down - perhaps because of another Aids-type epidemic for example - then you could find yourself having to pay more.

If you want to play safe, go for guaranteed rates. Whatever you decide is right for you, it pays to shop around, or to get an independent financial adviser to do so for you.

For a list of financial advisers near you, call IFA Promotion on 0117 971 1177.

Andy Couchman is publishing editor of HealthCare Insurance Report

Five Questions That You Need

To Ask About Term Assurance

l When would the plan pay out and how much will it pay? If your partner also needs life cover, look at joint cover, though single cover is better if you split up or the need for cover is likely to continue if one of you dies.

l Is the premium guaranteed? If not, how often are rates reviewed?

l Can the policy be extended or converted at the end of or during the term? If so, what are the options?

l Is this the cheapest cover in the market? Term assurance is a commodity product - there is little point paying more for a brand name.

l Will the policy be written under trust? This usually costs nothing but means faster payout on death and avoids having to pay Inheritance Tax on the sum assured.