A vital expense: How to choose the right life insurance policy

If the worst happens, you’ll want to know that your family is protected, says Rob Griffin

Sales of life insurance may have risen sharply over the past year but millions of people are still not adequately protected because they find the process of choosing and buying cover complex and time-consuming.

An impressive 282,438 new life-insurance policies were bought in 2008 – almost 30 per cent more than the previous 12 months – and the highest for eight years, according to the annual Term & Health Watch published by Swiss Re.

This rise is attributed to a combination of more products being marketed at the over-fifties that require little or no underwriting, and increasing awareness from consumers about the need to protect their family's interests.

However, despite this uplift and the fact premiums have become cheaper, there is still a £2.3trn protection gap – defined as the difference between the cover needed and what has been taken out – which hasn't been helped by a fall in term assurance sales.

"The industry needs to raise its game in terms of communicating to consumers the need to purchase adequate protection," states the Swiss Re report. "This becomes even more vital as confidence in the value of, and return on, savings is eroded."

Financial advisers insist the protection industry has major issues to tackle, particularly with regards to speeding up the underwriting process and publishing comprehensive data on how many claims are actually paid.

A general lack of consumer confidence is another contributing factor as to why people aren't taking out protection, according to Andy Gadd, head of research at Lighthouse Group who suggests the industry could do more to help solve the problem. "There are still plenty of people who have no idea what life insurance does or the benefits of various policies," he says. "For those that do apply, the size of the application form requesting detailed medical histories can put them off."

The underwriting process – during which a provider is assessing the potential risk to an applicant's health – can take months, particularly if they have a complex medical history that requires reports from doctors and specialists. "The press also regularly has stories about insurance claims that have been turned down," adds Gadd. "There is inevitably a story of personal tragedy and distress behind them which gives the insurance industry a tarnished image."

So what do people need to know?

The idea of life insurance is to provide financial security for dependents if the main breadwinner dies. Generally, the policy will be expected to clear the mortgage and significant debts, and provide a small nest egg for the family.

There are two main types of life insurance: whole of life and term. Whole-of-life policies pay out when you die – irrespective of when that may be – while term policies operate for a fixed time and only pay out if you die within that specified period.

Premiums for whole-of-life policies are usually more expensive than term because it is certain that the insurance company will eventually pay out, unless it is turned down for reasons such as a pre-existing medical conditions not having been declared.

Term insurance is the most widely used – and cheapest – form of protection and applicants can choose the length of period (term) they want to be covered. It pays out a lump sum when the person insured dies and this makes it ideal for paying off a mortgage or investing to produce an income for dependents. If the applicant lives longer than the agreed term, they won't get anything back from the money paid in.

How do you know which policy meets your needs?

The first step is to clarify what level of protection you already have in place. For example, have you got any existing investment policies? Does your employer's pension fund give you any cover? There is no point paying for protection unless you need it, says Geoff Penrice, a financial adviser with Honister Partners.

"It is very important to match the cover you buy with your actual needs," he says. "There is a huge range of policies available so it is worth taking advice to make sure you make the right decision."

For example, many people will insure their lives for £100,000, but in many cases this won't be enough. The minimum required should be enough to pay off all outstanding debts, as well as providing a lump sum for each of their dependents.

As a rough estimate, calculate how much you need to sustain your standard of living over an average 12-month period and then multiply this by 25 years. It's also worth noting that the earlier you start paying in life the cheaper the premiums will be.

You must shop around for the best deals and get advice on issues such as whether couples should buy joint policies, and how to set them up to avoid future inheritance tax complications, points out Gadd.

"Not all insurers will assess a particular individual as presenting identical risk," he explains. "One might load an overweight person's life insurance premium by 50 per cent, while another might add a far smaller sum to the cost of a policy."

Penrice says it's also essential that people choose a company with a good record of paying out claims, as this suggests customers are less likely to encounter problems.

"It is vital to select one that will pay out if problems occur, as well as providing a high level of service," he says. "This is much more important than looking for the one which is offering the cheapest premium."

The number of claims paid is generally high, although not everyone gives details about the claims paid, and those that do often take different approaches to each other, which makes it difficult to compare the various policies.

For example, Aegon, AXA, Bright Grey and Scottish Widows all publish their claims statistics, while Bupa, Skandia, Zurich and Standard Life currently don't, according to LifeSearch. Neither Scottish Provident, LV= nor Friends Provident publish their statistics, but they are prepared to disclose them when asked. Royal Liver, meanwhile, will start publishing its statistics after its fifth birthday in October.

Gadd believes those firms that aren't being fully transparent with their claims statistics are missing a golden opportunity to improve the industry's reputation in the eyes of potential customers.

"If all insurance companies provided detailed information on their claims history for various policies, this would not only highlight those that have been paid but, perhaps more importantly, the reasons why some are declined," Gadd says. "It would be an invaluable tool in helping put consumers' faith back in the insurance industry."

Whichever company you choose – and whatever type of policy – the golden rule is to be honest and answer every medical question as truthfully as possible, insists Andy Merricks at Skerritt Consultants. "Some insurance companies will look for any ways to wriggle out of paying the money, so don't give them the opportunity," he says. "It is never worth lying in order to shave a few pounds off the cost of a premium."

However, industry figures believe some of the criticism levelled at companies is unfair and say that most life-insurance providers serve a critical role in helping people through difficult times in their lives.

Stephen Crosbie, head of propositions for protection and investments at Aegon, says it is always unfortunate when a claim has to be turned down. However, he insists that the industry does all that it can to get proper disclosures in place.

"People forget what a service we are providing to the public and the economy because we pay out millions of pounds," he says. "All the people receiving the money will have needed that money at times that could have been financially debilitating."

Case study: 'Life cover is essential'

Jayne and Steve Green bought life insurance to help protect their growing family – and say it is the last expense they would cut from their monthly budget.

The couple, who live in York with their children, Joe, four, and two-year-old Isaac, both took out individual Level Term policies with Legal & General via LifeSearch.

Jayne, 38, pays £6.55 a month for £100,000 over 10 years, while it costs social worker Steve, 37, £18.28-a-month for cover worth £300,000.

"We didn't really think about life insurance until we had children," says Jayne.

After reading up on the subject over the internet, the couple put their trust in LifeSearch to come up with the best policy for their needs.

"We knew what we needed and didn't want to spend hours talking to a salesman," she adds. "LifeSearch called me back and it was quickly done and dusted."

Life cover is now something they would not be without. "We are all cutting back substantially due to the credit crunch but you can't afford to lose your life cover," says Jayne. "If the worst happens – and it can – the last thing you want when you're grieving is worrying about how you are going to pay the bills."

The questions consumers need to ask

We asked Matt Morris of LifeSearch to come up with the key questions that people need to ask their advisers when buying life-insurance policies.

* Am I better off with a different policy instead of life insurance?

* Should I write my life insurance policy into trust?

* Are my partner and I better off with two single policies rather than a joint one?

* Have you got a claims desk that can fight our case if the insurer declines to pay?

* Do you offer any free extras with your policy?

* Do I get free terminal illness cover with the policy?