The continued economic downturn means people have less money to spend on insurance, according to a new report. But this is a dangerous gamble when it comes to one type of cover.
Sales of whole of life insurance in the UK fell 57% between 2007 and 2012, largely because people have decided they can't afford it any more, according to recent figures.
And it's a trend that looks set to continue, even though it could be very risky for some households.
The importance of life insurance
Life insurance pays out to your loved ones should you die within the covered period. So if you have a wife, kids or significant others, it's worth getting some form of cover to ensure they are not left out of pocket should you pass away.
If you don't have any loved ones that could suffer financially from your death, then in all likelihood life insurance is something you can do without.
As for the affordability, life insurance suffers from the misconception that it is an expensive piece of cover. In reality, it's really pretty cheap, and has been getting cheaper for the last decade.
The different types of life insurance
Whole of life insurance costs more than the more common 'term' insurance as it can pay out at any point, as opposed to paying out during a set time period, say 40 years. The policyholder pays a monthly sum – a certain amount of the money is invested into life funds, which means the total amount paid out and the monthly fee can change.
There are three types of term cover. Level term cover offers a set amount of cover (say, £200,000) for a specified period (the term). So let's say you got £200,000 worth of cover over a 30-year term. No matter whether you die in year one of your policy or year 29, your loved ones will receive the full payment of £200,000.
As the name suggests, decreasing term cover offers cover which gets smaller over time. This is typically taken out by people who are primarily focused with ensuring their cover will pay off the mortgage should they die. So, using our £200,000 example, should you die halfway through your policy, your family will get about £100,000.
The reason this is attractive to many is that it works out cheaper than going for level term cover. For a 30-year old, non-smoking male to get £200,000 worth of cover on a 30-year term, level cover would work out at £10.84 a month (from Aviva). However, decreasing cover could be bought as cheaply as £8.39 a month (from LV=).
Increasing term assurance offers cover that increases in size each year. The important selling point here is that there's no need for a medical each year as the level of cover grows. And a growing level of cover can be pretty useful, given the way your circumstances may change (a larger mortgage, more kids, etc).
Are investments and savings a suitable replacement?
The report also claims that these insurance products are facing increasing competition from the banking and wealth management sector through investments and savings products.
However, for a savings or investment product to become a real alternative, its value would need to be extremely high. For most people that's simply not realistic.
The cost of life insurance
Term insurance premiums have been steadily falling in the past five years, despite a jump when the European Union gender directive came into force at the end of last year, which meant insurers have to paid men and women the same.
The price you pay will depend on your individual circumstances. For example, a 37-year-old woman who doesn't smoke and wanted a 15-year policy which paid out £200,000 could pay anything from £11.82 a month with Legal & Genera, to £14.72 with Aegon.
The same cover for a smoker would cost slightly more, with Beagle Street charging £20.77 a month up to Bright Grey at £25.98.
A joint policy can also be bought, although this will only pay out once on death, so it's usually better for couples to buy separate policies.
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