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Last updated: 10 February 2022
Our guide takes a look at the different types of life insurance and the factors that affect your premiums to help you decide which one is the most cost-effective depending on your circumstances. Here are our top tips for getting cheaper life insurance.
What personal factors affect the cost of life insurance?
Lifestyle is one of the biggest. If you smoke, you will usually pay more (sometimes more than double) for life insurance than non-smokers. If you give up and stop smoking for over a year, you’ll be eligible for a cheaper life insurance policy. As well as smoking, other aspects of your lifestyle (such as drinking habits and weight) can increase your life insurance costs. Being overweight puts you at higher risk of health issues such as diabetes, stroke, heart attack and some types of cancer. If you’ve lost a lot of weight, let your insurer know because they may be able to adjust your premium. Consuming a lot of alcohol also increases your health risks, so if you cut this down your premium may be reduced too. If these lifestyle changes are made, as well as informing your current insurer, consider shopping around for a new policy as you might find a better deal.
Another factor is age – the older you are, the more you are likely to pay for life insurance. It’s a good idea to buy life insurance when you are younger, because the cost of life insurance rises with age. The younger you are, the less insurers consider you likely to make a claim, so it will be cheaper.
Choosing the most cost-effective insurance type
There are different types of life insurance policies and choosing the right one for you and your situation is vital to ensure you’re paying for what you need:
Term life insurance – this can protect your family in the event of your death only if it happens during the policy. It pays a lump sum which you have agreed with the insurer, and you can select a time period for the policy (such as 10, 20, or 25 years). There are two types of this insurance policy. Level term insurance pays out the same amount throughout the length of the policy (no matter when the death occurs, your dependants will receive the same amount).
Decreasing term insurance means that the amount the policy will pay on the event of death reduces in line with a debt such as a mortgage. Decreasing term policies often cost less because the amount they pay out reduces over time.
Whole of life insurance will cover you until your death – there is no set time frame for cover. These premiums often cost more than term policies because a claim is guaranteed to be made. However, term insurance can also ideal in many situations, for example, parents may only want a policy until their children have left home. So consider which type of policy would suit your life circumstances best so you’re only paying for the cover that you want.
Joint insurance policies
Couples, or people with a shared financial interest (such as a joint mortgage), can either buy a joint insurance policy or two separate policies. A joint policy can be cheaper than two separate ones. However, if one person passes away, a joint policy will pay out and the policy will end, whereas the remaining partner will still be covered with two single policies. If you do not have any other dependants, joint insurance is likely to be the best option as the payout will go to the surviving partner. However, if you have other dependants such as children, it will benefit them to receive two separate payouts as they would receive a higher amount.
Put your life insurance policy in trust
A trust is a legal arrangement that enables you to give your policy to trustees, who become the legal owners and look after it on behalf of the beneficiaries. This can be done for different types of life insurance policies including term insurance and whole of life insurance on both joint and individual policies.
Doing this ensures that payouts made on your policy will not be subject to inheritance tax, meaning your family can save money. Your family could be liable for inheritance tax at 40% on the proceeds of a life insurance policy if the total value of your estate is more than £325,000. Your insurer can guide you through this, and it’s a free process. As it may result in your dependants getting more from a payout and the taxman less, you may also be able to arrange a cheaper policy and reduce your life insurance premium.
For more information, head over to our page on life insurance and trusts.
Regularly review your policy
If certain circumstances change, the policy can be amended which could make it cheaper. For example, if you have a child, a change in occupation, or decrease in debt. Shop around and compare life insurance deals if you need to change your policy, as staying with your current one may not be the cheapest option. If you are considering switching, check your existing policy for exit fees.