Life insurance provides your dependants with some financial security in the event of your death, providing you with greater peace of mind. If you do not have a partner, children or other dependents, you may not need life cover.

Policies can be quite complex and it is vital that you shop around - and preferably seek independent advice - for a deal that meets your requirements.

Which type should I choose?

There are two main types of life insurance: term and whole-of-life.

Whole-of-life insurance pays out an agreed sum when you die, whenever that is, and is generally more expensive.

Term insurance is generally cheaper because you choose how long you are covered for, say, 10, 15, or 20 years. This “term” could be the length of your mortgage or the length of time that your children will be dependent.

However, term insurance pays out only if you die within the term you have agreed. If you live longer than the term, you receive nothing. As a couple, you could take out term cover in both your names, with the policy paying out if either of you die during the term.

Within term insurance, there are different types of policy available. The most popular is level-term insurance, which is where premiums are fixed for a number of years and there is a full payout on a claim at any point during the term.

Increasing term insurance has higher premiums because the cover increases every year without the need for a medical.

Decreasing term insurance has cheaper premiums, but the payout reduces over the cover period at a flat fixed rate each year.

Mortgage protection insurance is where the lump sum reduces in line with the outstanding mortgage balance over time.

Family income benefit

This type of insurance is slightly different because, instead of paying out a lump sum, the cover provides a tax-free annual income to dependents until the end of the term specified at the outset.

What are the exclusions?

When buying insurance, always check for exclusions. For example, you may not be covered while taking part in risky sports. If your health is poor when the policy starts, some causes of death could be excluded or you may be refused cover altogether.

Most life policies have optional extras, such as a waiver of premium. This means that the insurance company will pay your premiums to maintain the benefits under the policy if you become ill or injured and cannot work.

Critical-illness policies provide cover against the risk of you having a serious illness such as a heart attack or cancer. If you develop one of the illnesses listed in the policy, a lump sum (or occasionally a regular income for a set period) will be paid.

FSA-regulated companies or brokers selling life insurance must provide you with a Keyfacts document, which outlines the services that they offer and the key features of any policy they recommend. This is useful to compare different policies.

How much will it cost?

The cost of your insurance will depend on several factors, such as the amount of cover you want and the length of the term.

Of course, it is also based on the likelihood of your insurer having to pay out: if you are a smoker and work in a dangerous job, you will pay more than a non-smoking office worker.

Always compare what is covered by a policy, not only the price. Some are cheaper than others, but they may not offer the same level of protection.

What happens if I die?

Experts also recommend that you put your policy in a flexible trust. This allows the proceeds of your life insurance to be paid to your dependents in the quickest and most straightforward way. Most good brokers and independent financial advisers will arrange this free of charge.

Matt Morris, of Lifesearch, the insurance broker, says: “Trusts are very quick and simple to set up. The great advantage is that money is passed to your beneficiaries directly, without reference to your will or the taxman, and without being delayed by probate. It speeds the process of getting the money to your beneficiaries by six months, on average.”

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Five websites

Direct Gov

Association of British Insurers

FSA

Life Search – life insurance broker

Moneyfacts - Life assurance best buys

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