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For an insurance product that can pay out hundreds of thousands of pounds for a single claim, it’s surprising just how little small print there is in most life insurance policies.
In fact they’re surprisingly simple. Just as long as you keep paying your premiums, you can expect your family to get the lump sum they were promised if you die.
That’s quite reassuring given that no-one needs extra aggravation when a loved one dies. But while life insurance policies might be simple, do not make the mistake of thinking they are all alike.
Huge policy differences
Sure, they all offer the same thing, but the difference in price between the best and worst policies can be huge even if the difference in premiums look tiny.
Digging a little deeper is the best way of seeing how these minute variations in premiums add up to a much bigger and scarier sum over the length of the policy.
Examining some 15 of the most popular providers, based on the typical example of a 25-year policy for 35-year-old man who doesn’t smoke, we found:
- For £100,000 of standard cover, the lowest monthly premium was £8.22 and the highest, £10.15. That doesn’t sound like too much but over the length of the policy it amounts to a substantial £579
- For £200,000 of cover the lowest and highest were £14.64 and £17.12, racking up a £744 “loss” over the same period.
If that doesn’t seem bad enough, the differences soar between the lowest and highest premiums when opting for standard level term cover but with critical illness cover thrown in.
- For £100,000 level term and critical illness cover, the lowest and highest premiums were a much more substantial £38.07 and £40.12 – a difference of £615 over the lifetime of the policy.
- For the same deal but with £200,000 of level term cover, the premiums were £73.23 and £77.15, adding up to a difference of £1,176
From this, we can easily see that for a difference of less than a fiver a month, the total extra you can expect to shell out over the policy term adds up to well over £1,000.
This in itself should make you wary of signing on the dotted line until you’ve made great efforts to find the cheapest premium for the cover you’ve chosen. But the biggest differences are reserved for Decreasing Term cover. This is where your insurer provides cover that reduces over time and which is therefore a lower cost option than going for Level Term cover that pays out the fixed sum agreed no matter when the claim is made.
- For £100,000 decreasing term cover, the highest and lowest premiums were £6.34 and £7.87 – a difference of just £459 over the policy term.
- For similar cover but with £200,000 of decreasing cover the premiums were £10.43 and £12.80. adding up to £711
However, the big differences show up on decreasing term cover with critical illness cover added on.
- For £100,000 of this type of cover the cheapest and highest premiums were £22.83 and £28.58 – a hefty potential saving of £1,725 over the term.
- But for £200,000 of this cover the lowest and highest were £42.37 and £57.62 which amounts to a whopping £4,575 over the term.
Is critical illness cover worth it?
As you can see from the cost of the premiums shown, there is a big difference between opting for straightforward 'level' cover, and critical illness cover.
As its name suggests, critical cover will provide a payout if you are diagnosed with one of the illnesses described in the policy you have opted for. These are naturally more complicated than straightforward life insurance and you should ensure that the list of illnesses covered is sufficiently comprehensive to make you comfortable with the extra premium you are paying.
That said, all policies provide a basic level of cover set by the Association of British Insurers (ABI). You can expect cover for these seven core conditions: certain types of cancer, coronary artery by-pass surgery, heart attack, stroke, kidney failure, major organ transplant and multiple sclerosis. Policies generally also cover a range of additional conditions as well as total and permanent disability.
How much more could it cost?
You might think that it’s simply a question of “getting what you pay for”. Unfortunately, however, as the examples of level cover show, there doesn’t seem to be any justification for a variation in premiums. After all, if you die and your life is covered for £100,000, that’s how much your insurer will have to pay out – no matter how much your monthly premium was.
All this anomaly proves is that you have to be very careful to shop around for the best deal. There’s probably no point paying even a few pence more each month on level cover, while you could lose a small fortune by choosing expensive critical illness and decreasing term cover.
The key is to work out whether the difference in the premiums you are quoted can be justified by any extra cover. Don’t just assume this will be the case. In fact it is usual for there to be absolutely no difference in the extent of cover!
The moral of this story is that whilst it’s always a good idea to shop around for the best insurance deal, when it comes to life insurance, it’s even more important.
This is one area of personal finance where you can easily avoid being ripped off.
