New players have entered the market giving you greater choice and bringing down costs.

Ten tips for picking the right life insurance 

THE bad news about life insurance is that you normally have to die to receive the benefit. The good news is, it's getting cheaper. Straightforward life cover - known as term assurance - has dropped steeply in price in recent years. 

For example, a policy that provides £300,000 of cover to a 30-year-old man for 15 years typically cost £37 a month in 1994. This year he should expect to pay about £21 - a drop of more than 40%. 

Premiums are falling for several reasons. First, we are living longer, which means a policy that provides cover for a fixed number of years - the term in term assurance - has less chance of paying out. 

Another reason for the drop in charges is that more companies want to sell us policies. As well as the usual insurers, new players such as Marks & Spencer, Virgin Direct and Direct Line are competing for business. 

1. How much life assurance should I take out? 

You can't have too much life assurance. But the bigger the sum assured, the bigger the premiums. The first thing to check is that you have enough insurance to meet outstanding debts, particularly your mortgage. 

Some lenders insist that you have appropriate cover in place and may ask you to sign the policy over to them so they get the money if a claim is made. 

Other lenders do not require insurance to be in place. But if you die owing money, they will seek to repossess the property and sell it to recover the debt. 

If you have an endowment policy that is intended to pay an interest-only mortgage, life assurance cover is built in. 

Buy enough insurance to provide for those you leave behind. Think of the amount of income they would need to survive each year, then think about how much would have to be invested to generate that amount, given that capital investments are yielding about 5%. If £25,000 a year is enough, you would need insurance cover of £500,000. 

2. Check what life cover you have already 

As well as your endowment policies, you may have cover through your pension scheme, which means you get tax relief on the premiums. There is a limit on how much insurance you can buy this way - you can only spend up to 5% of your earnings on what is known as pension term cover. 

3. What determines the cost of cover? 

The level of premiums is determined by a number of factors, including your age, sex, health, whether you smoke, the amount of cover you require and the length of the term. 

The younger you are, the lower the cost. For example, a man aged 30 who wants £100,000 of cover for 25 years would pay about £11 a month, while a man aged 50 would pay £30 for just £50,000 protection. 

Women generally tend to pay less because, statistically, they live longer. According to Swiss Re, the average monthly premium for a 30-year old non-smoking man with £300,000 of cover over 15 years is £21.27, compared with £17.15 for a woman. If you are seriously ill or suffer from a condition such as diabetes, you will have to pay more. 

4. What happens if I am a smoker? 

If you want cheaper insurance: kick the habit. If you can state that you have not smoked for a year, you will enjoy far lower premiums. According to Swiss Re, a non-smoking 30-year-old man with a £100,000 policy over 15 years would pay about £9.90 a month, against £13.50 if he smoked. 

For a man aged 45, the differences are even greater. For the same policy the non-smoker would pay about £27 a month, the smoker £49. 

A non-smoking 30-year-old woman with the same cover would pay £8.70 a month, but £11 if she smoked. At 45, the figures would be £20 and £33. 

5. What if I can no longer afford the premiums? 

Term assurance is a simple policy - you pay and you are covered. If you stop paying, the cover lapses. If you are incapacitated by injury or illness and unable to work, you have to consider whether you would still be able to afford the premiums. When you take out a policy you can, however, opt for "waiver of premium", so the premiums do not have to be paid while you are not earning, but it is expensive. 

6. Can I claim on the policy before I die? 

Some policies include what is known as a terminal illness or accelerated death benefit. If you are diagnosed as terminally ill, then the policy will pay out immediately. People are terminally ill if they have 12 months or fewer to live. 

7. Make sure your policy is written in trust 

Life assurance should always be written in trust. When you die, the policy will then pay the beneficiary straight away. If it is not, the cash will go into your estate and may be liable to inheritance tax. If your total estate exceeds the 'nil-rate band' of £231,000, the surplus is taxed at 40%. 

8. Use life assurance in your tax planning 

In a bid to avoid inheritance tax, some people try to reduce the size of their estate by giving wealth to family members. However, the taxman is alert to the tactic and if wealth is transferred within seven years of death, then tax will be payable (although gifts to spouses and charities are always tax-free). 

The inheritance tax calculation is made on a sliding scale. Die within three years of making the gift and tax will be charged at the full rate of 40% of the value of the gift. For each additional year you survive, the percentage of tax payable falls by 20% so that, in the seventh year, there is a potentially a charge of 20% of the original tax bill. If you gave £100,000 and died the following year, then inheritance tax of £40,000 would be payable by the person receiving the gift. In the seventh year, the tax bill would be 20% of £40,000, or £8,000. 

To anticipate inheritance tax, take out decreasing term assurance. Here the sum insured matches the potential tax liability. If you die, the proceeds of the insurance will keep the taxman at bay. 

9. Should I review my cover at any point? 

Yes. If you look at your policy on a regular basis, you will ensure that the premiums are competitive and that the amount of cover is adequate. Remember that term assurance has no investment value, so if you find a cheaper deal, you simply stop paying premiums with one company and start with another. 

A woman smoker aged 40 with a 10-year term policy worth £200,000 at Lutine Assurance will pay £20.21 a month. Marks & Spencer charges £34.25 - a difference over the term of £1,684.40. 

However, age and medical conditions help determine the size of the charges, so if you start afresh after a number of years and have suffered a deterioration in health, you may struggle to find a cheaper quote. 

10. Where should I buy term assurance? 

You can buy term insurance from the company or via an independent financial adviser. There is only limited availability online. Ins-site ( www.ins-site.co.uk), an internet broker, can get quotes from eight firms but does not include those that only deal direct with the public, such as Direct Line and Virgin. 

Switch term assurance and save thousands 

Christine McLaine switched her term assurance to Direct Line and saved £28 a month on the premium. She now pays £81 a month for £156,000 of protection and is insured for the next 10 years. The policy is in place to cover the mortgage on the house she is buying in Blackpool with her husband David, a cabaret star, whom she manages.

Over 10 years, paying the lower premium will save Christine £3,360. Direct Line sells over the telephone and Christine was impressed with the service: 'It couldn't have been easier. I had to have a medical because of the size of the sum assured, so the company arranged for a doctor to visit me at home. Everything was fine and the policy came through in a matter of days.' 

Sunday Times 20 November 1999