Life insurance can be a tricky form of insurance to purchase. There are two quite different types of life insurance and multiple ways a life insurance policy can be purchased. This complexity basically demands the buyer to do some background research, and carefully compare life insurance quotes. Life insurance is not one-size-fits-all and when comparing life insurance you want to make certain you are comparing apples-to-apples to get the best low cost life insurance.

Life insurance is also different from other forms of insurance in that you are insuring a life and not an object. Life insurance can be a major aspect of your financial planning and strategy, and some policies offer more than simple death benefit protection.

Term Life insurance versus Permanent Life Insurance

Term life insurance and permanent life insurance is the starting point when looking for life insurance. Keep in mind these two basic life insurance categories are very different and life insurance policies can combine benefits or even change from one type of life insurance to another type of life insurance at some point. Term life insurance in its simplest form is life insurance coverage a set period of time – the “term.” Your beneficiaries are paid a death benefit only if you die during the term. Keep in mind term life insurance does not usually build up a cash value, but at the same it typically offers lower premiums in the early years of the life insurance policy.

Premiums do rise with term life insurance as you renew terms. Often you can renew your term life insurance policy, even with a health change, but expect to pay a higher premium. Questions to ask when comparing term life insurance include if there’s an age limit to renewing the policy, and if renewal of your term life insurance policy starts requiring a physical examination at some point.

The second major type of life insurance policy is permanent life insurance. Permanent life insurance comes in a number of types including universal life insurance, variable universal life insurance, and whole life insurance. The key difference between permanent life insurance and term life insurance is permanent life insurance policies offer long-term financial protection. Premiums are usually higher, but permanent life insurance includes a death benefit and very likely a cash savings.

Individual Life Insurance, Group Life Insurance and Credit Life Insurance Policies

The next set of choices to tackle is how to actually buy your life insurance policy – as an individual or as part of a group. Individual life insurance gives you the most control over your policy. You make every decision for the life insurance policy, such as choosing the life insurance company, the actual life insurance plan and the life insurance policy features to customize the life insurance plan for you and your family’s needs.

There are a number of ways of buying an individual life insurance policy, but it is commonly done through insurance agents or insurance brokers. Any individual life insurance policy will include fees or commissions, with the usual commission in the form of a “load” figured into the life insurance premium rate.

With a group life insurance policy you most likely be automatically insured by your employer, often with an option to add to that insurance under the group policy. Most group life insurance provided by an employer is term life insurance, and it does have some advantages. The rate is often lower than for individual life insurance, you likely receive the life insurance without any health qualifications, and the payment usually comes in the form of a payroll deduction which helps ensure you don’t miss a life insurance premium payment.

With all these options in types of life insurance policies and how to buy the life insurance products, it’s easy to see how important comparing life insurance possibilities and doing your background research is before actually buying life insurance.

One final type of life insurance above and beyond the life insurance options listed above is credit life insurance. This life insurance comes from lending institutions and credit card issuers, and will pay off your outstanding loans as a death benefit. Sometimes credit life insurance is built into the loan and other times life insurance can be offered as an option as part of your credit agreement.

The publication of a parliamentary bill could do away with a law that punishes insurance claimants for honest mistakes

An archaic law that means thousands of insurance claims each year are unfairly rejected by insurers could be overturned following the imminent publication of a parliamentary bill.

Claims made on motor, travel, household and health policies are routinely turned down by some insurance companies under an anomaly in the law, which dates back to 1906 and puts a “duty of disclosure” on the policyholder.

This means policyholders are expected to disclose not only things they have been asked for, such as known medical conditions, but also things that they haven’t which could later turn out to be significant. So, someone who is diagnosed with throat cancer, for example, could see their health insurance claim rejected if they had failed to mention a past visit to the doctor for a sore throat when they applied for the policy – even when the doctor prescribed nothing more than a few days’ rest, and the question was not asked by the insurer.

Claims are also turned down when householders accidentally get information wrong. A common example is when applying for household insurance, where the question “Are the locks British ’safety-standard’, a five-lever mortice lock conforming to BS3621, or a cylinder rim deadlock?” is commonly asked. Not surprisingly – especially since a householder would often need to take the lock out of the door to find out – it is often answered wrongly. Yet, if a householder claims on their policy, even for something unrelated to locks, such as a fire, they could find their claim rejected.

Consumer groups, health charities and many insurance companies have long called for a change to the law, saying that it is unclear and unfair.

“At the moment, the obligation is on you, the consumer, to disclose all the facts that might have an effect – decisive or not – on the mind of a prudent underwriter in assessing the risk,” says Peter Tyldesley, a lecturer at the University of Manchester and insurance law specialist. “This is setting consumers up to fail.”

After years of consultation on the issue, on 15 December the Law Commission will present a draft bill to parliament that should spell the beginning of the end to these often disastrous discrepancies in the law.

The Observer understands that the bill will propose the law is changed to abolish the duty of disclosure – volunteering information without being asked – to providing only the information asked for by insurers. It will also propose changes to the way insurance companies deal with policyholders when they get something wrong. So, for example, if a policyholder makes an innocent mistake, they will have their claim paid in full and if they are “careless”, rather than reckless, they should get a proportionate payout. If, for example, they have only paid half the premium which would have been charged had the underwriter known the true facts, they may receive a payout of only half the amount of their loss.

“The issues of non-disclosure and misrepresentation have been running for many years,” says Tamara Goriely of the Law Commission. “We think the law needs to be changed so that it is clear, accessible and easy to understand.”

At the moment, around 1,000 insurance cases a year involving non-disclosure end up with the Financial Ombudsman Service, which often then rules in a policyholder’s favour. The vast majority of these claims are for large amounts of money, says the Law Commission, often involving people going through a particularly vulnerable time such as dealing with a cancer or MS diagnosis.

“We’ve always had a broader view of disclosure than the courts,” says an FOS spokesman. “If the insurer hasn’t been specific enough in its questions, for example, we might rule in the consumer’s favour.”

Marketing consultant Inga McVicar had to turn to the FOS in 2007 when she was diagnosed with ovarian cancer but found herself unable to claim on her critical illness insurance policy. Her insurance company turned down her claim over a discrepancy in her answers on the initial form, which was due to an error by her financial adviser.

As soon as she realised the error, says McVicar, 33, she told her insurer but it treated the policy as if it had never existed. “What shocked me more was the horrific way my insurance company dealt with me over it,” she says. “They branded me a liar, failed to return my calls and, to add insult to injury, in a letter to me referred to my diagnosis as breast cancer not ovarian cancer.”

By February 2008, McVicar had to return to work as she is self-employed, despite the fact she was undergoing chemotherapy. “To add to this, the anomaly in my policy the insurer was referring to didn’t remotely relate to my diagnosis and it turns out even if I had answered that one question correctly I would have been covered, albeit with increased premiums,” she says.

Macmillan Cancer Support provided Inga with a grant to help with her basic needs while she took her case to the Financial Ombudsman Service. The ombudsman ruled in her favour, agreeing that it was a genuine mistake. She got a payout of £46,000 and is now in remission from the cancer.

Many insurers do not apply the letter of the law, taking a more reasonable approach to claims. However, a minority do apply it rigorously.

A spokesman for the Association of British Insurers, said: “We don’t believe there is any need for intervention as far as non-disclosure is concerned. Where there are areas of concern, we believe these have been addressed. We have introduced a code of practice for critical illness insurance and the number of complaints has reduced significantly.”

However, progress has not been made in other areas, says Goriely. “In household, motor and travel, particularly where the claim relates to a medical condition, there is no evidence that [disputes over non-disclosure] have dropped off.”

“We think it’s ridiculous that consumer insurance is based on an archaic law from 1906,” says Phil Jones, public affairs officer at Which?

“The Law Commission report is an excellent opportunity to address this issue so we urge all political parties to support the bill.”

■ Have you had a claim refused for non-disclosure, and did you resolve the issue? Would you support a change in the law? Email us at cash@observer.co.uk or write to us at Cash, The Observer, Kings Place, 90 York Way, London, N1 9GU.