How to lower the cost of life insurance

Let me start with a common misconception: that you’ll find a cheaper price for life insurance by shopping around with different brokers or price comparison sites. Life insurance just isn’t that sort of product.

Not convinced? Take a look at the quotes below, gathered on 23/6/2021 from Anorak, Compare the Market and Confused. They’re all for the same amount of cover and customer profile – £500,000 of level life insurance cover over 30 years for a non-smoker born on 1/1/1990.

Now let’s look at any quotes from the same insurers side-by-side:

Anorak’s cheapest quote was £19.99, Compare The Market’s was £19.92, and Confused’s was £19.88. The differences between quotes for the same insurer from different providers is generally minimal. Proving the point that shopping around does not really move the needle when it comes to reducing the cost of your life insurance policy.

Why can’t you ‘shop around’ for cheaper life insurance?

We’re all in the habit of shopping around to get a better deal – so you might be a bit confused about why this doesn’t really work for life insurance. The main reason is because life insurance is a heavily regulated financial product.

The pricing needs to be sustainable for insurers in a way that isn’t true of other unregulated products. This is because the economy would be badly impacted if a life insurer fails – and why it’s priced rigorously by actuaries using an abundance of data. This is also why you’ll never see a deal on a life insurance product, like ‘get 50% off if you buy before x date’.

Why is there any price difference at all?

Any difference in the life insurance quotes is probably due to the different sellers earning slightly different commissions when they sell a policy. Again, this only tends to affect the price marginally, as most sellers aren’t comfortable cutting their commission too far. It’s similar with mortgage rates, which don’t really change much from broker to broker (despite what they might say).

Is there any way to reduce the cost of life insurance?

Yes, there is. Buying ‘less’ life insurance is one obvious way, but it’s not the only way. Plus we wouldn’t recommend by any less cover than you need, even if it makes it cheaper. Instead, you can be clever when buying life insurance to reduce the cost in other ways.

Just like a barista might change different variables in pursuit of the perfect coffee – the beans, grind size, roast, temperature, etc. – so you can tweak different variables in the life insurance cover you buy (besides the amount) to reduce the cost of your monthly premiums. By taking a closer look at what you really need to cover, you can do this without becoming under-protected.

This process of finding adequate cover at the lowest cost is actually what Anorak does for our customers. Our algorithm recommends the most suitable cover for you: the cover that meets your needs at the best price. Let me elaborate with some of the methods it uses – which are by no means the only ones, but a good illustration of ways to reduce the cost of life insurance:

Consider all of your household’s expenses AND income

People typically total up all of the expenses they think they’ll have over the next x years and think that’s what needs covering with life insurance. This can be a very big number – especially if you’re young and are calculating expenses decades into the future – which would be expensive to cover with life insurance.

However, if you’ve got a partner who also has an income, they might be able to cover some of these expenses themselves. If they can, you don’t need to cover the entire expenses total with life insurance. Factoring in your partner’s income can significantly reduce the amount of life insurance you actually need – and therefore how much it’ll cost to be insured.

Consider how long you really need to be insured

Working out at what point your partner would be able to support themselves financially, or at what point your children will become financially independent, could allow you to choose a shorter policy length. If your children will be financially independent in 20 years time, for example, you probably don’t need a policy to run all the way until you retire, which could be 25 or 30 years away. At Anorak, we’ve built in logic to identify exactly how long you need life insurance for.

Reducing the length of your life insurance cover not only reduces how long you’ll be paying premiums for, but also the price of your monthly premiums. The price you pay each month takes into account how much of a risk you are to be insured over the life of your policy. The older you are towards the end of your policy term, the higher risk you’ll be to insure, and the more expensive your monthly premiums will be. Choosing a shorter policy length will reduce the premiums that you pay now.

Using the same profile as the example above, I’ve looked at how much you save by reducing your policy term from 30 years to 20 years.

Buy ‘decreasing’ or ‘family income benefit’ cover instead of ‘level’

Decreasing cover and family income benefit are both types of life insurance that pay out less the later a claim is made on the policy. This doesn’t happen with level cover, which always pays out the same amount, whenever a claim is made. For this reason, decreasing cover and family income benefit cover are around 30% cheaper than buying an equivalent policy on a level cover basis.

And while these kinds of cover are cheaper, they could still be perfectly adequate for your needs, in the right circumstances. If you’ve got a mortgage, for example, your family would probably need a bigger payout if you die sooner than if you die later, because your outstanding mortgage would be bigger. There’d also be more years worth of expenses to cover. Conversely, if you die later, there’ll be a smaller outstanding balance on the mortgage and less years of living expenses to cover.

There are other factors that could also reduce your life insurance premiums. We factor them all into the advice we give at Anorak. We believe the best starting point is working out the minimum you need – i.e. the life insurance cover that meets all of your needs at the lowest cost. If you can afford to, it could be that you want to leave more money to your family or protect yourself for longer than you strictly need to, but making sure you understand what you truly need is the best place to start.