The mistake that will leave your partner in the lurch
Don't make this silly mistake when buying life insurance...
My old school-mates are dropping like flies. One by one, they keep succumbing to the three words that strike terror into my 24-year old heart: long-term girlfriend.
Suddenly every night out or weekend away has to be run by the ‘other half’. All conversations seem to lead back to chat about ‘something funny my girlfriend said the other day’. Well, I’m not laughing.
Despite my hostility – or some might say bitterness – there is one big mistake you definitely shouldn’t make when you do find that ‘special someone’...
Joint cover
It’s probably not an appropriate proposition for a first date, but at some point in a relationship, you’ll want to start thinking about life insurance.
Life insurance pays out a lump sum to your family should you die. It’s often sold with a mortgage to ensure that your partner isn’t left saddled with debt should you pass away. Needless to say, life insurance is essential cover if you are the main earner in your household and have dependents.
You can buy life cover in a single or joint policy form. Getting hold of joint cover for you and your partner will be cheaper than buying two single policies – but that doesn’t mean you should opt for it...
In the lurch
Joint cover will lower your premiums – but not by that much.
Using the lovemoney.com life insurance calculator I found that the cheapest single policy for a 30 year old non-smoking male with £200,000 of cover, lasting for 20 years, is £8.45 per month. The amount for a 30 year old, non-smoking female is exactly the same; so that’s £16.90 a month for the couple. Joint cover for the same two people of £200,000 over 20 years comes out at £14.05, just 20% less.
The problem is that joint cover only pays out once, upon the death of the first policy holder. So if you die before your partner and you have a joint policy, you’ll be leaving partner in the lurch with no existing protection.
Yes, they’ll have your payout – but when they die, no insurance sum will be passed onto your children or any other dependents. Unless your surviving partner takes out another policy that is. However, chances are that by that point, they’ll be a lot older and hence their premiums will be a lot higher.
So – going back to my fictional thirty year old couple – the joint policy in question may cost less at £14.05 per month, but it’s only for one payout of £200,000. The two single policies at £16.90 per month on the other hand will pay out two lots of £200,000. That’s double the protection in the long-run for just a 20% increase in premiums.
But if you want to get hold of these low rates, you’ll have to hurry...
Premiums will rise soon
Back in March we reported that life insurance premiums were at their lowest level for nine years. And the good news is that they’re even cheaper now.
However, after speaking to an insurance insider last week, the general consensus in the sector is that rates will not stay at this level for long. This is mainly down the looming influence of the European Court of Justice’s (ECJ) Gender Directive. The directive – ruled on back in March – states that insurers can no longer factor in gender when setting premiums.
Currently, men pay more than women for life insurance. This is because they generally have a lower life expectancy, so will make fewer payments before they die and a claim is made. But when the ECJ ruling fully comes into force on 21 December 2012, this difference will be equalled out, and rates will rise for women.
What’s worse is that most people believe men’s premiums probably won’t even come down to meet women’s rates in the middle. So no-one will better off!
It’s more than likely that this price inflation will start over the next year as insurers slowly ramp up premiums in the run to the December 2012 deadline.
So if you’ve been planning on taking out a life insurance policy – do it now!
Some more tips...
Finally, here are three more essential tips to bear mind when buying life insurance:
Written in trust: Writing your life insurance policy ‘in trust’ separates it from the rest of your estate when you pass away. This means that your family can get at the money quicker and it won’t be taxed.
Get enough cover: Keep updating the size of your cover if your situation changes; don’t just sign on the dotted line and leave it alone.
For example, if you take out cover when buying a home with your partner, you’ll want to enough to clear the mortgage, so as not to leave your loved ones in the lurch. However if you have a child then you’ll probably need to add to the policy in order to see them through school or university.
Never lie: Lying on your life insurance application is one sure way of getting the policy voided and really leaving your family high and dry. Be completely honest about your medical history. If you’ve smoked in the last 12 months, make sure you also tell the insurer – as they’ll almost certainly class you as a smoker.
More: Get a life insurance quote with lovemoney.com | Watch out if you've been sold this insurance! | 5 silly life insurance mistakes | The biggest life insurance mistake
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OorWullie: I have to respond - What tosh. What would have happened if one of your friends had died (heaven forbid) and let's say it was the main earner? How would the remaining party have survived and beenable to carry on paying this £50pm mortgage on what is now a £400,000 property, but was not, way-back-when? When you can look at the situation now that time has passed, it's very easy to rubbish life insurance, but what if?......now that's the question. Insurance is a gamble and has always been so. I have a family (with 3 kids) and if I popped my clogs, I'd want to die knowing that they would get a substantial payout to maintain their lifestyle and for that, I'm prepared to pay my premiums. However, Term Insurance/Assurance is (pardon the pun) dead money, so I have a Whole of Life policy. I don't give a darn that I will keep paying until I die (couldn't get Premium Ceasing at the time and I doubt if one can arrange it nowadays?). You see, Assurance Companies are not looking to underwrite such policies any longer, as they are guaranteed to have to pay out at the end and that is not sound business, since it's less profitable for them, therefore they push Term policies instead. As such, EVERYONE should look at Life Insurance and those that say it's not worth it should consider, what if?....
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In my younger days my wife and I took out a life insurance policy for (then) £5000 at about £50 monthly. Friends of ours who resided at Stevenage took up the offer of purchasing their Council house at around the same time and price and with the same monthly outlay. A few short years later our friends were still paying their mortgage of £50 monthly while their house had increased in value considerably. This compelled my wife and I to take on another life policy which cost us an additional £25.00 monthly. Later still, our friends while still paying the £50 monthly mortgage, their property had doubled in value (incidentally, we were then living in a service tenancy). My wife and I, in order to keep abreast of the rises in the cost-of-living, took out another life policy which raised our monthly premiums to £100 for around £100,000 life insurance, however, our friend's house was valued above £200,000 yet they were still paying a mortgage of £50 monthly! We reviewed the changing situation, cashed-in our life policies after 10 years of payments, and in return received almost exactly what we had paid in premiums (no interest whatsoever). We then invested in the housing market and have never looked back. Our friends who had paid-up their mortgage after 25 years were able to translate the increased value of their accommodation into cash to help their children buy their own accommodation yet our friends still live in a house which today is around £400,000 and initially purchased for monthly payment of £50 over 25 years while our mortgage was considerably more! The message is obvious; forget about life insurance and do your own saving and investing. Today, with this experience, I would still seek to get into the property market as early in life as possible. While it may seem expensive initially it sure will pay dividends later in life but forget about life policies.
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On these figures if the insurance companies insure 10,000 X 30 year old. It would mean more than 100 of them dying before the age of 50 before the companies made a loss on it. I would expect maybe 1 or 2 not to make it and so the companies would get to keep most of the £20,000,000 in premiums. It sounds like a good business to be in. Win the Euromillions and become one of the 'names' at Lloyd's of London!
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09 October 2011