Six things to check before setting up the family’s financial safety net

PERSONAL insurance premiums are set to rise this year, as the market vies to boost profitability.

That was the prediction last week from Axa, after it unveiled a drop in 2010 underlying earnings to £131m from £235m in 2009.

So what better time to make sure you’re covered? While hunting down a competitive deal is a must, it shouldn’t be your sole consideration.

Peter Chadborn, a director at Plan Money, the independent financial adviser, says: “Don’t be fooled into thinking that it’s all about cost. There are other valuable features to consider.”

Here, we look at everything you need to know when buying a financial safety net for your family:

CHECK YOUR EMPLOYMENT CONTRACT
Many employers provide their workers with life cover as part of their total remuneration package, so check your contract. This is often between two times and four times your annual salary, says Patrick Connolly, at financial adviser AWD Chase de Vere.

KNOW WHAT YOU NEED
Life cover is often taken out by those with dependent children, but there are different types depending on what the policy proceeds are designed to do. Would your beneficiaries need cash to repay a lump sum debt or replace lost income?

Connolly says the “most appropriate” life insurance for most families is “family income benefit”. If you were to die, this would pay a regular tax-free income up until a specified date, usually when dependent children reach age 18 or 21.

“This is the cheapest form of life cover, so can be afforded by families even if they’re on a fairly tight budget,” says Connolly.

“As it pays a regular income, the person setting up the policy doesn’t have to calculate a lump sum amount to provide the required level of income for dependents and the beneficiaries don’t have to worry about where best to invest the proceeds to generate income.”

This is a form of “decreasing term assurance”, because the total amount paid out decreases the longer the assured person survives for.

In contrast, “level term assurance” might be appropriate if the payout required doesn’t reduce over time, for example if you’ve taken out an interest-only mortgage.

ACT SOONER NOT LATER
The cost of insurance rises the older you get, given the greater likelihood of your death (see tables below).

A man aged 30 on his next birthday could buy £250,000-worth of level life cover over 20 years for £11.54 a month with PruProtect, says Chadborn. A man aged 40 on his next birthday would have to fork out £21.55 for the cheapest deal, from Legal & General, and if he waited a further ten years he’d have to pay £54.55 per month, also to L&G.

BE FLEXIBLE
The cheapest isn’t necessarily the best. Some policies offer the flexibility to amend the term or cover part-way through the policy. For example, if you were a smoker and became a non-smoker, you could shave pounds off your policy.

Some 13 per cent of insured smokers have not smoked or used nicotine patches for at least a year, yet 51 per cent of them still haven’t informed their life insurer of their new “non-smoker” status, according to Sainsbury’s Bank.

They could save 46 per cent. Smokers pay on average £210 a year for life cover, almost double the £114 of non-smokers.

loOK FOR ADDED EXTRAS
Some policies come with extras, such as access to the best doctors and counselling support services for your beneficiaries in the event of your death. Consider what added extras it might be worth paying a small premium for.

TRUST IN TRUSTS
Should you put your policy in trust? There are a variety of reasons for doing so.

“This could ensure that the proceeds are distributed exactly in accordance with your wishes and facilitate a speedy payment, without having to wait for probate to be granted,” says Chadborn. “In certain circumstances, trust can also serve as an effective inheritance tax planning tool.”