Policyholders who have remained loyal to their insurers could be paying over the odds for their life cover, with premiums up to a third cheaper now than a decade ago.
According to London & Country (L&C), a broker, premiums for level-term assurance, where a cash lump sum is paid if the policyholder dies during the policy term, are now 20 to 30 per cent lower than they were in 2000 (see table).
“The drop in premiums has left many existing policyholders paying too much,” said Richard Morea, technical manager at L&C.
“Many policyholders won’t realise that, not only has the cost of life assurance fallen, but some monthly premiums can be double the cheapest.”
Under level-term assurance life cover, the sum assured remains the same over the policy period, typically the length of an interest-only loan. But the fall in the cost of cover is not limited to these policies.
Market observers say whole-of-life policies have also edged down in cost. Unlike term assurance, these policies are open-ended, with no set termination date. They are available either with an investment element or as a guaranteed non-investment contract – though the latter is more expensive.
“Over the past few years, we have certainly observed some movement on the cost of premiums for both fixed term and whole-of-life assurance, with [rates on] both coming down,” said Emma Walker, head of protection at Moneysupermarket.com, a price comparison website.
“This highlights why the need to shop around for your insurance premiums is more important than ever.”
Analysts say that the growth in the number of price comparison websites, along with policies being sold directly to the consumer rather than through an adviser or intermediary, has increased competition and pushed down premiums.
The cost of premiums for level-term assurance is based on a number of factors, including medical history, general health, age, gender and lifestyle factors such as whether you are a smoker or heavy drinker.
However, those shopping around on the internet for a cheaper premium should be wary of the headline rate.
“Price comparison sites often quote reviewable rates for term assurance as it is a cheaper policy option rather than guaranteed rates,” said Morea. “However, reviewable rates may look cheaper in the beginning but the policy could actually become more expensive during the term. You need to be sure you are comparing like with like.”
Even if a cheaper rate is found, other advisers said the golden rule is not to cancel an existing policy too quickly.
If a life insurance company decides a client is high risk, it can increase the premium – known as “loading” – which can be by as much as 50 per cent, according to Matt Morris, a senior policy adviser with LifeSearch, the independent financial advisers.
“You might find that the new policy will be loaded if you have developed health problems since taking out your existing plan,” he warned. “Or, your policy terms could be less generous, as might be the case with critical illness, which is often sold with life cover, where a policy bought today would be less likely to pay out than one bought 10 years ago.”
Those who aren’t shopping around for a new insurer could also make big savings on their existing policies if they are smokers and are prepared to quit (see table).
“Typically, for a 25-year-old in good health, £100,000 of cover costs between just £5 and £7 per month, roughly the cost of 20 cigarettes,” said Ben Heffer, an analyst with Defaqto, the research analysts. “A smoker could pay as much as £10 or £12 per month.”
To qualify for a non-smoker rate in the middle of a policy, a policyholder must have quit smoking at least 12 months previously.
“It is important that you are truthful on the application form because if you do not disclose the full facts, your cover could be invalid,” said Heffer.
Some insurers, such as HSBC Life, Police Mutual and Scottish Provident, will also give non-smoker rates to those who agree to wear a nicotine patch.
High levels of competition in the life cover market are driving some providers to offer special deals. L&G, Aviva and Direct Line offer extra incentives such as Marks & Spencer vouchers to new life cover customers. Other providers include terminal illness benefits with their cover at no additional cost. This benefit allows those who are diagnosed with less than 12 months to live to claim early on a life insurance policy. Terminal illness benefits differ from critical illness cover, which pays a lump sum on the diagnosis of a set range of conditions.
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