Life insurance: mistakes to avoid
Life insurance can be a scary phrase and, as with all daunting subjects, there can be a lot of misinformation around! So how can you avoid making a mistake when taking out a policy?
Life cover is designed to safeguard the finances of your family or dependents should you pass away. It is often used to pay off a mortgage, enabling your loved ones to stay in the family home or to meet bills and everyday living expenses if, for example, your partner needs to take prolonged time off work to grieve or look after children.
- Don’t lie to get cheaper life cover
It’s very tempting to leave out what you might think are small details when searching for a life insurance policy, such as whether you smoke or whether you’re currently undergoing medical tests. Unfortunately, little (or significant) lies might be picked up later down the line, at the time of a claim being made, and could invalidate your policy.
There are several other ways in which you can keep down premiums to a price you can afford, such as reducing the level of cover insured. In difficult times, it would be better to have a smaller payout than no life insurance at all, as this will alleviate at least some of the financial pressure.
- Do your life insurance research
As with all types of protection insurance, there are different life cover policies to suit different needs, ages and lifestyles. Make sure you understand what each type of life insurance offers. With, for example, level term insurance - also known as fixed life cover - the lump sum received is set at the same amount for the duration of the policy term, regardless of whether the payout is after one year or 21 years.
Decreasing life cover, on the other hand, does what the name suggests, with the payout reducing with each year of the policy. This can be a good option if you have a mortgage, with any payout decreasing in line with the mortgage balance left to pay.
- Don’t assume a joint life policy is cheaper
If you’re married or living with a partner, understandably you might assume that joint life insurance is the cheapest and easiest option. And, sometimes, it is, covering both of you at the same time and with reduced paperwork.
It’s important to remember, however, that most joint life cover policies pay out only on the first death, leaving the surviving partner in need of a new policy if there are dependents, such as children, to look after. In addition, think about what might happen if you and your partner split up. You will have to compare individual life insurance policies - possibly at a later stage in life when you might find that the premiums go up.
- Don’t listen to the mortgage myth
According to ActiveQuote research carried out earlier this year, nearly two thirds of homeowners believe they must have insurance such as life cover in order to take out a mortgage. Our survey revealed that 60% of property buyers were told by mortgage providers that protection insurance must be in place for the sale to go ahead, with a third (33%) being told it was a legal requirement.
This simply isn’t true and we’ve called on the industry to provide clear and accurate information around the home-buying process. However, buying a property is always a good point at which to assess your financial protection and make sure that, should anything happen to you, your family is financially safe and sound.
- Do make sure your life insurance is written in trust
Setting up a trust enables you to leave an asset to a named person or people, such as your children, in the event of your death. Life insurance is classed as an asset and writing your policy in trust can have a number of benefits for those you love.
Firstly, a life insurance policy written in trust goes directly to the beneficiary. It does not go into your estate - the assets left upon your death - and so isn’t included in any inheritance tax calculations. In addition, life insurance does not go through probate, which can be a lengthy and sometimes complex process that can leave families in limbo. Writing your life insurance in trust ensures that the payout reaches its intended beneficiaries smoothly and quickly.
If you have a family, we understand your concerns about discussing death and critical illness. You might be glad to know, therefore, that young people would like to learn about finances, buying a home and bereavement, and opening up subjects such as life skills and insurance protection could stand you all in good stead. Find out more in our series of life insurance articles or follow us on Twitter for more!