Cost of insurance set to soar following European court ruling

Premiums on protection insurance are set to soar. The European Court of Justice has ruled that from 21 December insurers can no longer charge different premiums for men and women, following a challenge by the Belgian consumer group Test-Achats, which argued that pricing by gender was discriminatory.

Insurers take into account various factors when setting premiums, including age, previous health problems, occupation and – perhaps the most important – gender. They argue that using gender in the underwriting process provides an accurate reflection of the real cost of insuring an individual.

Furthermore, from 1 January, insurers will be subject to a new tax regime, which will put further pressure on premiums.

These factors combined will result in premium increases for most people if they delay taking out cover. Those with existing policies will be unaffected.

"People can be forgiven for thinking that this is one big marketing campaign by the insurance industry, but it isn't. It is genuinely a call to action, because the prices available now will, for many people, be higher after 21 December," says Peter Chadborn, managing partner of the independent financial adviser Plan Money.

Insurance experts say women will be hit the hardest in most cases, although males face premium rises too.

On average, women pay 17 per cent less than men for life insurance, which pays out a lump sum if you die. Women have a longer life expectancy and are therefore less likely to claim during the term of the policy.

Experts predict the ban on gender-based pricing could cause female life-insurance premiums to soar by 25 per cent. Males, too, are unlikely to escape price rises. So far, insurers have been keeping tight-lipped about how much they expect to charge new customers in the early part of next year, but see increases of up to 5 per cent.

A 45-year-old woman looking to buy £150,000 life cover over 20 years will currently pay around £20 a month with the insurer LV=. If insurance experts are right, the same woman would end up paying £1,000 more over the duration of the policy if she takes it out in January. A male taking out the same policy could expect to pay up to £200 more over 20 years if he took out the cover next year.

So by taking out cover before the 21 December deadline, you could save yourself hundreds or even thousands of pounds over the life of the policy.

Ray Black, of the life and protection comparison site money-minder.com, says: "If women know that in the next few months, or indeed in 2013, they are going to buy some life cover, they should consider buying at least some cover early in order to lock in the lower premiums."

It is not only life insurance that will become more expensive. Both sexes will also have to pay more for critical illness cover, a type of insurance policy which pays out a lump sum if you are diagnosed with a serious illness and is sold alongside life insurance in many cases. Experts say men are likely to pay around 6 per cent more each month for critical illness cover and women around 16 per cent more after 21 December.

But things are not all bad for women. While they will be hit hardest when taking out life and critical illness, they are set to pay a lot less for income-protection insurance, which pays out a tax-free monthly income – normally up to 75 per cent of a person's salary – if the policyholder is unable to work due to sickness or accident.

Currently, women pay up to 65 per cent more, on average, for income-protection insurance because statistically they are more likely to claim. However, a person's age, job and health record can influence the price hugely.

But after 21 December, female income-protection premiums are expected to fall by up to 28 per cent, while male premiums are likely to increase by around 20 per cent.

At the moment, a 30-year-old, non-smoking female looking for an income-protection policy paying £1,500 a month up to the age of 65 will pay around £34 a month with the insurer Bright Grey. The male equivalent is £20.

If experts are right, both will end up paying around £23 to £24 a month if the policy is taken out next year. This means the man would be roughly £1,600 worse off over the 35-year policy if he took it out after 21 December, but the woman would save more than £4,200.

But while it might be tempting for women to wait until prices for income-protection cover come down, it could prove risky.

Kevin Carr, chief executive of the Protection Review, a body set up to raise awareness of the benefits of taking out protection, says: "Even though income-protection rates for females could fall, they shouldn't delay buying cover as their circumstances could change. A relatively minor change in someone's health – like developing diabetes, high blood pressure or a bad back – could make the cover more expensive or even discourage some insurers from offering them cover at all.

"If you are a woman and thinking of taking out income-protection insurance, the best thing to do is take out cover now and then switch to a cheaper policy when rates fall."

In most cases, insurers can determine the price of the policy and offer the customer cover within a matter of days. However, if for some reason the insurer needs further medical evidence or a GP report, the process could take weeks or even months.

Furthermore, some insurers have decided to stop using gender to determine the price of premiums before the 21 December deadline. LV=, for example, has decided to make the switch on 1 December, meaning that consumers need to get their applications in before this date to secure cheaper premiums. PruProtect plans to make the switch for its whole-of-life product – a type of life cover which has no set term length – on 3 November, while Zurich will begin to switch on 10 December.

If you want to make sure you are not caught out by increased prices it is a good idea to speak to a financial adviser as soon as possible, as they will know exactly when each insurer plans to switch to so-called "gender neutral" premiums.

David Hollingworth, of the mortgage and insurance broker London & Country, says: "Although some customers could find that they are accepted instantly on standard terms others could find the process lengthier. If there is a need to go for a GP report to further understand the customer's medical history then there could be delays. Although there may be leeway to start the cover after the deadline, many providers will require full underwriting to have been completed by then.

"If it gets to the wire and the required documentation is not supplied it could result in the cost literally rising overnight because the deadline is missed."

However, while price is an important factor in choosing protection insurance, it is not everything. Although most insurers offer life, critical illness and income-protection insurance, policies can vary, even if they are priced similarly.

Further, protection products can be complicated – especially income protection and critical illness – so it is best to get advice from an independent financial adviser or a mortgage broker specialising in protection to ensure the product you buy is best for your circumstances.

"Consumers should still take the time to ensure they have the most appropriate cover for their needs, which for a product such as income protection may be a more complex decision than when buying straightforward term life cover. Rushing to secure a lower premium but for the wrong policy may be a move you later regret," says Mr Black.

"Regardless of any regulatory changes, it usually makes sense to take out protection insurance sooner rather than later. The cost of life insurance increases with age, so by taking out cover now rather than waiting a few years, individuals can expect to pay lower monthly premiums," says Louise Colley, head of protection sales and marketing at Aviva, the insurer.

What different types of cover offer

Life insurance

This type of cover provides a pay-out to your dependents in the event of your death. There are different types of life cover, some which last the whole of a person's life, which can be expensive, and term insurance, which will pay out if you die within the term of the policy. Most people can apply for life insurance but it is normally taken out by those with a family wanting to ensure the mortgage can be repaid on their death.

PROS:

Peace of mind that the family will be looked after if you die

Pay-out is generally quick

Can be very cheap if you are healthy

CONS:

Can be costly if you have bad health or a dangerous hobby

With term insurance, you could outlive your policy

Critical illness

This product pays a lump sum if you are diagnosed with a serious illness. In the majority of cases, this type of cover is sold alongside life insurance.

PROS:

This type of cover can protect yourself and your family should you be diagnosed with a serious illness

Some policies will give a partial payout if one of your children becomes critically ill

CONS:

Can be expensive

Not all conditions are covered, so check the small print

If you have a condition before applying, it may not be covered

Income protection

If you cannot work through illness or injury, you receive a portion of your salary tax-free. Anyone of working age can apply.

PROS:

Good for the self-employed

Handy if your family relies on your wage alone

CONS:

This type of cover does not cover redundancy

It can be expensive, depending on what job you have