The biggest life insurance mistake

Make sure you're not making this big mistake with your life insurance.

Whenever anyone mentions the words life insurance, the general reaction is one of boredom. A few yawns, a general glazing-over of the eyes, and perhaps a sigh or two as well.

But although life insurance might not be the most riveting of subjects, it is an important one. After all, if you have dependents and the worst were to happen to you, how would they cope financially? Having a life insurance policy in place is a way of ensuring they will be protected and be able to continue paying the mortgage and so on.

Of course, you might be reading this and smugly thinking, ‘Well I already have life insurance, so it doesn’t matter’. However, even if you do have life insurance, when was the last time you actually took a look at your policy and considered whether you had the right amount of cover?

Not enough cover

Recent research from Sainsbury’s Life Insurance has revealed that over five million Brits could be leaving their dependents in serious financial difficulty because more than half of those with life insurance are failing to update their level of cover following a significant change in their personal circumstances.

In fact, this is how it breaks down:

Source: Sainsbury’s Life Insurance

All of us will see our personal circumstances change at some point during our lives. And if you fail to update your policy due to these changes, you could leave yourself seriously under-insured.

So let’s take a closer look at when you need to update your life insurance policy.

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Buying a house with a partner

If you’re buying your first home together with your partner, you’ll probably have a joint mortgage. This means you need to think about what would happen if something did happen to you, and your partner was left paying the full mortgage payments by him/herself.

To ensure your partner won’t be left struggling to keep up with the mortgage repayments, it’s important to update your life insurance policy and check you have the right amount of cover.

Getting married

Similarly, if you decide to get married or enter into a civil partnership, you need to check you have enough life insurance cover as you’ll probably be relying on each other financially for every day living expenses.

Having children

Now you really will have dependents, which means there’s no excuse for not having a life insurance policy in place. Children are expensive, so you need to check you have enough cover so that if something happened to you, your partner could continue to support your family financially.

Getting a new job

If you’re moving jobs, it’s a good idea to check what employer benefits you’ll receive. That’s because some employers offer death in service benefits.

However, while this is a handy benefit to have – as it will pay out a lump sum to your beneficiaries and can be around two to four times your salary – it still may not be enough to cover your family’s financial needs.

So it’s still worth taking a look at your own life insurance policy – particularly as this one will stay with you even if you move jobs!

You may also be earning more money, enabling you to have a more affluent lifestyle - in which case you'll need a higher level of cover.

Buying a bigger home

If you’re moving to a bigger house, again it’s time to consider the level of cover you have. If you’re upgrading to a larger property, chances are, you’ll have a larger mortgage. So make sure you update your life insurance to cover that.

You’re in debt

You also need to think about any other debts you have – not just your mortgage. If you have a personal loan or credit card debts, ensure your life insurance cover will be sufficient to cover these too.

More children

Whether you decide to have more children, adopt or foster kids, or even have extra people living with you, you need to ensure you have enough life cover in place. After all, the more dependents you have, the greater their financial needs.

Getting divorced

If you get divorced, again you need to weigh up whether you have adequate life insurance. If you’re bringing up children on your own, you may need to increase your cover due to a greater financial obligation.

On the flipside, if you don’t have any dependents, you may find you have too much cover, in which case you can reduce your level of cover.

Giving up work

Whether you’re quitting work to become a stay-at-home parent, or you’ve hit retirement age, you need to update your life insurance.

If you’re staying at home to be with your children, you need to think about covering the costs of childcare and running your home. This can work out to be far more expensive than you think!

Meanwhile, if you’ve retired, you need to consider rather gloomy aspects such as funeral costs, which your partner would have to fork out for if he/she outlives you.

Don’t forget...

Finally, it’s also important to remember to include aspects such as food bills, energy bills and council tax when you’re working out how much life cover you’ll need. After all, it’s not just the mortgage your family will have to pay for and you’ll need to consider that they may struggle to pay for these additional costs. To ensure your family is fully covered, take a look at this cover calculator to work out how much cover you need.

It’s also worth remembering that life insurance doesn’t have to be expensive. You can pick up policies from as little as £5 – in fact, life insurance is now at its cheapest level in nine years.

Be aware, however, that although it’s generally cheaper to buy a joint policy rather than two single ones, it won’t provide you with as much cover. That’s because it will only pay out once – when the first person dies – so the survivor will be without cover. Two single policies pay out twice – so you’ll get double the protection.

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