Where can you buy life insurance?

Rule No. 1 with life insurance is to shop around. Another smart move is to buy separate 'his' and 'hers' policies, instead of a 'joint life, first death policy', which pays out once and ceases after the first death, leaving the survivor uninsured. By buying two individual policies, you can get two payouts - potentially twice as much cover - for just a few pounds a month more. Also, individual policies make life easier when it comes to inheritance tax, and if you separate or divorce.

How much cover you need depends on many factors. If you have a partner or children, the first thing you need is enough cover to pay off your mortgage and other debts. After that, you need life insurance cover to replace at least some of your income. Realistically, cover of ten times your gross income, meaning your salary before deductions, should give your dependants a reasonable standard of living.

Of course, how much money a family needs will vary from one household to another so, ultimately, it's up to you to decide how much to leave your family so they can enjoy a reasonable standard of living. Perhaps a better question is 'How much cover can I afford?'

Another critical question is how long should you be covered for? It makes sense to cover yourself until your normal retirement age, usually sixty or sixty-five. However, if you have young children, you should cover yourself until they are financially independent, which usually comes after they have left school or university and are earning their own money. There's no point in buying a policy that lasts until you reach, say, eighty, because your children will have left the nest and you'll be enjoying life as a pensioner.

Now we come to the question of taxes. Although a payout from a life insurance policy is tax free, it could form part of your estate and be liable to Inheritance Tax (IHT), which could eat up to 40% of your payment.

The simplest way to avoid IHT is to place your policy 'in trust', which enables any payout to be made directly to your dependants, neatly avoiding the taxman, your estate and any Will. Certain kinds of trusts allow you to control what happens to your payout after death and speeds up payment. However, they cannot be used for life insurance policies that are assigned to your mortgage lender. Your insurer or broker can probably set up the trust for you at no extra cost.