Check Your Life Insurance Policy

A friend of mine recently discovered that his life insurance policy, which actually turned out to be a mortgage endowment, was almost worthless. He has a wife and child and he was worried what would happen to them if he died. All he wants is simple life insurance to cover him and his wife until he retires at age 65, or until his daughter is old enough to fend for herself financially. Here are the three pieces of advice that I gave him:

1. Shop around for lower premiums
Firstly, I suggested that he got several online quotes for term assurance. I suggested he use the internet for this. If you can find the same cover for £20 a month less, it could save you £6,000 over 25 years.

2. Beware of 'joint life, first death' policies
Most couples buy 'joint life, first death' cover, which pays out a lump sum if either partner dies. However, these policies expire after paying out one lump sum, leaving the surviving partner uninsured.

However, you get much better value for money by buying two separate polices. For a few pounds extra each month, you get twice as much cover, because you get two payouts. In fact, by shopping around for two separate policies, it can be cheaper than buying a joint policy. Strange! Separate policies also make life easier when it comes to inheritance tax - and if you separate or divorce, because it's just about impossible to divide up a joint policy!

3. Look into family income benefit (FIB)
If you're looking to cover your mortgage, you need to buy a policy that pays out a lump sum if you die, so that your entire debt is paid off. However, if you're protecting your partner or family, you don't need to buy a policy that delivers a lottery-sized payout. After all, how many people have the skill to invest this money wisely to replace the income of a deceased partner or parent? Furthermore, big payouts mean big monthly premiums!

If you want to provide your partner or dependants with an income if you die before collecting your pension, family income benefit (FIB) is a far cheaper alternative to life insurance. Instead of dropping a lump sum in your family's lap, it pays them a tax-free income for a defined period. The savings can be really impressive and make this worthwhile considering.