Why giving up your life and income insurance could be a costly mistake: Concern grows as more households drop coverage due to cost of living crisis
- Soaring bills led to what is known as ‘the Great British Cut’
- Experts fear families are slashing essential insurance too quickly
- This could expose them to even worse money problems later on.
- Number of policies held by households down 8% from July last year
- Workers jeopardizing their pension plans by stopping their pension contributions
With a secure job and a good salary, Sophie Taylor has never had to worry about money before.
But the 31-year-old project manager is now so concerned about the soaring cost of living that she has decided to cancel her life insurance.
Police are said to have paid £200,000 if she died – enough to care for her family in Liverpool.
Safety nets: The number of protection policies – which includes life insurance, critical illness cover and income protection – held across the UK fell 8% from July last year
It also included critical illness cover, which meant she would receive a lump sum of £25,000 if she was diagnosed with a critical illness.
For Sophie, this protection insurance has brought precious peace of mind, especially since her mother is currently ill and the family does not yet know if the disease is hereditary.
Despite this, she opted out of cover in order to save £20 a month. Sophie says that as she works from home she needs that extra £240 a year for her energy bills. “I look at anything I can cut,” she says.
She is not alone. Experts worry about the number of households forgoing insurance that protects their financial future, in order to save money now.
The number of protection policies – which include life insurance, critical illness cover and income protection – held by UK households fell 8% from July last year, the company says iPipeline insurance.
And a survey by comparison site NerdWallet found that 41% of people plan to give up life insurance in the near future.
Money Mail recently revealed how some cash-strapped workers were jeopardizing their retirement plans by cutting their pension contributions. Now experts fear families are cutting back on essential insurance too quickly.
Elizabeth Buko, protection advisor at Wealth From Little, says many of her clients have reduced their life and critical illness cover due to budget constraints.
“These are very important if you have dependents who are dependent on you and who would suffer financially if you died,” she warns.
Life cover that will pay off the mortgage is important if you are the breadwinner, as your partner and children will be able to continue living in the family home.
How I saved nearly £1,000 a year – without losing peace of mind
Policy Overlap: Will Robins
As an expensive loom in the fall and winter, I decided it was time to review my family’s spending. Money always seems to come second to work and parenthood.
But with bills soaring, subscriptions and standing orders all coming under control (goodbye farm veggie crate).
Then I called my mortgage advisor to go over the life, critical illness, and protection policies he had in place. I wanted to understand exactly why I was paying almost £2000 a year.
My Vitality life cover costs £77.83 per month. He would pay £485,461 if he died – a sum that would increase with inflation.
This included critical illness cover, providing a one-time payment of £55,993 if I became seriously ill.
I was also paying £83.27 a month for critical illness cover with Legal & General, which would pay a lump sum of £96,000.
Both policies included income protection insurance, which covered 80% of my salary. In total, I was paying £161.10 per month, or £1,933.20 per year.
I’ve been careful not to reduce my coverage too much, even though I’m worried about food and energy bills. So I kept my income protection as is, but reduced the critical illness payment from £151,993 to £100,000.
I also changed my life insurance policy so that the coverage and my premiums no longer increase with inflation, but the payment still clears the mortgage.
I now pay £151.22 a month for life, critical illness and income protection policies with Aegon and LV=. This has saved me almost £10 per month, or £120 per year. But after looking again, I found another oversight.
My employer already offers an income protection policy covering 50% of my salary.
My wife has a similar contract, so our total household savings ended up being even bigger, at £70 a month or £840 a year.
We’ve given our bank balance a much-needed boost without sacrificing our peace of mind.
Will Robins, Citywire
And income protection policies ensure you can keep up with paying bills if you can’t work due to illness or layoff. see it as an easy option for the chopping block if you need to cut costs. But it only works until something goes wrong.
It doesn’t help that the premiums are going up. The average life insurance policy for someone in their 40s currently costs £29.79 a month, rising to £34.10 for people aged 50-59, according to comparison site Moneysupermarket. This represents an increase of £22.40 and £25.37 respectively in 2021.
However, experts say there are ways to cut costs without completely voiding your policy.
Ms Buko says the first step is to ask your broker or provider for a review, to see if your cover still meets your needs.
For example, if your policy pays £700,000 but your mortgage is only £350,000, you can reduce your cover by 50% to reduce premiums. Or if your policy lasts longer than your mortgage repayment period, you could shorten it.
Some providers also reward healthy lifestyles. “Many will reduce premiums if you were a smoker but haven’t used tobacco, vaping or nicotine products for 12 months,” adds Ms Buko.
Data from Drewberry Insurance shows you could cut income protection and critical illness premiums in half by increasing the wait time between filing a claim and getting a payment from four to 13 weeks. But you need savings elsewhere to fill the gap.
Adam Bullock, UK director of TopCashback, adds: “Check if your employer already covers you – many workplaces will offer life and health insurance.”
This is Money has teamed up with protection insurance specialist Cavendish Online to help readers find the best and cheapest life insurance. In exchange for a one-time fee of £25, any commissions usually paid are funneled back into the policy to make payouts cheaper. Learn and compare life insurance costs with our tool.
The best and cheapest life insurance
This is Money has partnered with Cavendish Online to bring our readers the cheapest life insurance quotes available on the market.
Those taking out policies can choose to pay a one-time charge of £25 and in return any commissions that would ordinarily be collected are funneled back into the policy to make cheaper payments, potentially saving thousands of pounds over the course of their life.
You can get a fully underwritten quote yourself online or speak to a fully qualified independent advisor who can compare life insurance and recommend the best option from a wide range of insurers.
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