Rest assured with some life cover

S ome 3m people in the UK would leave their families without financial protection if they died because they have no life insurance, according to new research.

The survey, published by Abbey, reveals that despite seven in 10 people believing that the most important insurance policy is one which provides stability for their family if they die, almost half have no life cover to speak of.

Reasons people give for their reluctance to take out life insurance include being too busy, not being sure what cover they would need and simply not wanting to think about what would happen if they died. A fear that life insurance may be prohibitively expensive is more understandable. But there are low-cost ways of providing no-frills family protection suitable for young families on a tight budget.

Take the example of a young couple who have recently had their first baby. Each partner needs to con sider what financial gap their death would leave.

For a person who works outside the home, this will roughly equate to their monthly take-home pay, minus any guaranteed death-in-service benefits their employer provides.

For someone who works at home it will equate to the amount their surviving part ner would have to pay someone else to care for the child and maintain the home in order to carry on working and earning their salary.

"Top priority for any young family whose largest monthly outgoing is their mortgage repayment is to take out a joint life mortgage protection policy designed to pay off this major loan should one of them die," says Michelle Moran from Macclesfield-based independent financial advisers Plan Invest Group.

Typically, this will reduce the surviving family's necessary monthly outgoings by a quarter to a third, thus reducing the amount of monthly income they will need to replace via life insurance.

Lee Coates, director of Cheltenham-based IFA Ethical Investors Group, warns that it's important to shop around for mortgage protection insurance because providers charge widely differing premiums for the same cover. You can do this either via a trusted IFA or by checking yourself with telephone and online brokers such as www.lifesearch.co.uk or www.easy-quote.co.uk.

For Mr X and Ms Y, a non-smoking couple both aged 30 next birthday, a 25-year joint life policy paying out a sum assured of £100,000 on first death, for example, would cost £8.87 a month from Norwich Union compared with £27.38 a month from Prudential.

Once the mortgage is covered, you need to consider policies which will replace the gap left in the family's income by one partner's death.



Level term insurance


A popular choice for young families looking for essential life cover is level term insurance, a no-frills protection product which pays out an index-linked lump sum if you die within a specified term and nothing if you don't. You can keep premium costs down by restricting the term to the period of time that your children are likely to remain dependent, typically until they are 21 and finish university.

Our couple with their first baby might be advised to opt for a 25-year term. That way, if they have another child within the next four years, the second child will be protected until they are 21 by the same policy.

Term insurance can be written as a joint policy, so the lump sum is paid out on the first death only, or as two single policies which means that if both parents die, say in a car crash, the children would receive two benefits. The latter is only slightly more expensive. For example, a joint 25-year level term policy with a £250,000 benefit that increases with inflation would cost £30.57 a month from Scottish Provident for Mr X and Ms Y above.

For two single policies with the same benefit, again from Scottish Provident, Mr X would pay £18.94 a month and Ms Y would pay £14.99 - a total of £33.93 between them.



Family income benefit


Another life cover option for young families is to buy less well-known family income benefit (FIB) policies, which can be arranged to pay your partner (you don't have to be married) an index-linked annual income for the duration of the term rather than a one-off lump sum.

"The downside of level term insurance is that it requires the surviving partner to enter into lifestyle financial planning at a time of grief and work out how to invest the lump sum to generate the family's required income," Mr Coates says. "What I like about FIB is that it actually does the job of replacing the monthly income of the deceased in the most direct and simple way."

While it is relatively straightforward to calculate what income your dependants would need to live on if you were to die, it's trickier to work out what lump sum they'd require to invest in order to generate an adequate income over a period of years, given the unpredictable ups and downs of inflation.

Another plus is that FIB is generally cheaper than lump sum term insurance.

A joint 25-year FIB policy paying an index-linked benefit of £15,000 a year, for example, would cost £23.39 a month from Liverpool Victoria for Mr X and Ms Y. For two single policies, each paying the same benefit, Mr X would pay £13.73 and Ms Y would pay £11.89 - a total of £25.62.

Compare these premiums with those charged for the level term policy above and it appears very good value. But there is a reason for the difference in price.

FIB is cheaper because, as time goes by, the overall payout decreases therefore the risk to the insurer is less. If, for example, a policyholder died in year 24 of the above 25-year FIB policy, the insurer would only have to pay out £15,000 plus inflation. But if the insured died in year 24 or the above 25-year term insurance policy, the insurer would still have to pay out the full £250,000.