Against the evil day

In the long run, we're all dead. This makes life insurance a necessity for anyone with dependants. The first step is to decide how much we need. Next we have to choose between a range of contracts, each designed to meet particular circumstances. Finally, we go shopping for the best deal.

Deciding how much we need seems straightforward. For those in work and with dependants this will be based on replacing lost future earnings. However, as Gordon Sim, of General Accident, points out: "Care is needed. Inflation can eat into policy proceeds over the years. It's not just a matter of lost income, but also of lost pension provision."

One commonly used formula is to insure for 10 times annual earnings, although this seems low if current returns on 90-day deposit accounts, an estimate of how much your money might earn, are taken as a yardstick. By the end of May this year these averaged a gross return of 4.13 per cent, suggesting that an income multiple of at least 20 times earnings would be prudent.

An alternative route to deciding how much insurance is needed depends on estimating future costs, and when they will occur. The advantage of this route is that different types of policy can be arranged to meet different needs, with a consequent saving on premiums paid.

The cheapest and most commonly sold type of policy is level-term insurance, where the premium, length of policy and sum assured - the amount payable on death - are all fixed at the outset.

The rates below apply to contracts which cannot be varied as circumstances change. Buying a contract with options to alter or increase the sum assured costs more at the outset.

For instance, General Accident offers a "conversion option", adding 15 per cent to monthly premiums for level term insurance, but allowing conversion to any of their other life policies for the same sum assured and without any medical examination. This could be valuable to someone who develops medical problems during the policy term, then finds the need an endowment savings plan to back a mortgage.

Another option is to combine level-term with critical illness benefit, which covers serious illness. Scottish Provident offers this type of policy, at pounds 30.51 per month to a man aged 35, for cover of pounds 50,000 over 25 years.

The effects of inflation on a policy may also be a source of concern. Zurich Life offer a contract linking both the sum assured and premiums to the RPI. This costs more at the outset, pounds 15.06 per month as against pounds 11.26, but ensures that the real value of the policy will be maintained. Zurich's John Hum points out: "The self-employed, and those with small businesses, often operate with liabilities which do not alter much in real terms. This type of policy meets their needs."

For those concerned with income replacement, perhaps while children are growing up, family income benefit (FIB) may be appropriate. This pays out a fixed sum each year over a fixed term. Norwich Union will underwrite a man aged 35 for a yearly benefit of pounds 20,000 over 20 years at pounds 32.19 per month. This is cheap by comparison, but, of course, the benefit decreases over the policy term.

Very short-term cover is also available. Specialist insurer Lutine offers a stop-gap policy for those changing employment, or between long-term policies. Payment of a single pounds 75 premium buys a 35-year-old man three months' cover of pounds 115,384. Lutine can also arrange special risk policies for those working abroad in war danger zones.

There are other types of policy to meet specific needs. Decreasing term assurance can be used to back up a PEP or repayment mortgage. Whole-of- life policies are used to meet inheritance tax bills. The more specific the need the greater the benefit of qualified advice.

An independent financial adviser (IFA) should have access to a computer service comparing rates, and contract options. They can advise on the attitude of insurers to adverse medical histories and whether tax relief may be available for the employed and self-employed.

Anyone with a fax machine can also dial the Moneyfacts level-term fax service (0336-400853). At a cost of 50p per minute, this will give updated rates for all major insurersn