10 things you need to know when buying life insurance

The TV ads are right: it’s important to provide for your family should you not be able (or around) to do so. But it’s also important to buy insurance that will do the job properly – and the cheapest product is a false economy if you or your family can’t make a successful claim.

The danger with cheap insurance is that premiums which are temptingly low now may have to rise sharply in later years. In the worst-case scenario, you may no longer be able to afford cover just at the time you need it most.

Also, cheap policies can be priced that way because they’re more restrictive – that is, they’ll have tighter definitions and more “exclusions” from the list of things covered. Insurers have to balance price and the risk they’re taking on in one way or another – if the price is low, it may be because it will be harder to jump the hurdles to a successful claim.

So, here are 10 things you need to know when buying life and income protection insurance:

1. Definitions and exclusions: What you call a brain tumour may not be what the insurer calls a brain tumour. Check the definitions in the fine print and the list of conditions which are and aren’t covered.

2. Pre-existing conditions: Some insurers won’t pay out on any pre-existing condition, no matter how long ago it occurred and even if you’ve recovered. Others may only want to know about the past five years. If you’re not sure whether something qualifies as a pre-existing condition, run it past them. Don’t hope they won’t notice when you make a claim. The contract you sign will almost certainly give them the right to talk to your doctor.

3. Income protection: This type of insurance can be sold on an “any occupation” or “own occupation” basis. Under the “any occupation” wording, you need to be unable to carry out any occupation at all, which is a pretty big hurdle. Under “own occupation”, you can claim if illness or injury stops you doing your own job. Check whether the policy mixes the two: perhaps paying a claim on an “own occupation” basis for two years but then switching to the “any occupation” test.

4. Waiting periods: Rather than skimping on a decent policy, a better way to reduce your premium is to have a longer waiting period. The longer you’re prepared to wait for a payout, the cheaper the policy will be. An income protection policy that kicks in after three months off work is cheaper than one that pays after a month.

5. Benefit periods: A policy that will pay out for two years won’t help if you suffer a major illness or injury, which is when a policy that pays out until age 65 will really come into its own. You may have total and permanent disability insurance tied to your life insurance, but this TPD cover has much higher disability hurdles to clear.

6. Agreed v indemnity: In income protection, an indemnity policy insures you for what you’re earning at the time you make a claim, while an agreed-value policy insures you for the income you are earning at the time you apply for cover. Naturally, agreed-value policies are more expensive than indemnity policies. Agreed value might be worthwhile if your income tends to vary.

7. Stepped v level: In life insurance, stepped premiums start lower but rise as you age (as does your risk of making a claim). Level premiums start higher but remain the same (apart for adjustments for inflation), making them cheaper in the long run. You can mix stepped and level to achieve a more affordable premium.

8. Guaranteed renewable: If a policy is guaranteed renewable it must be renewed by the insurer even if there has been a change in your circumstances. A life insurer can’t ditch you because you’ve developed a heart condition, say. Be aware that “sickness and accident” insurance or “accident-only” insurance may not be guaranteed renewable if it comes from a general insurer (the sort of insurer who provides car or household insurance).

9. Occupational category: Don’t forget to advise your insurer if you change occupations. Insurance premiums are also affected by the risk involved in your work – go from a high-risk job to a desk job and you’ll be entitled to lower premiums.

10. Product series: Ask what your insurer’s policy is on passing back new benefits to existing customers. Some insurers apply changes to all policies while others leave existing policyholders with inferior benefits and possibly paying a higher price than new customers.