How Not To Buy Life Insurance
Are you thinking of buying life insurance this summer? Make sure you don't make one of these five mistakes!
Life insurance is one of the oldest and most well-known forms of insurance. In theory, it should be fairly simple protection, in that it pays out only when you die. However, when you buy life insurance, you need to make three careful judgements:
whether you need it at all;
if so, how much cover you need; and
where to buy it.
It's at this point that things get a lot trickier. Thanks to the ever-increasing complexity of the world of financial services, buying life insurance can be something of a minefield. So, before you pick a policy, be sure to avoid these five mistakes:
1. Buying cover that you don't need
If you don't have a spouse, partner or any dependent children, then your death is unlikely to throw anyone else's life into financial meltdown. Thus, single, childless people have less need of life insurance. What's more, although you can leave assets to another person, your debts die with you. So, without any dependants, there's no need to insure your mortgage and other IOUs.
2. Buying from your mortgage lender
One of the biggest mistakes is to buy life insurance from a bank or other mortgage lender. When you arrange a home loan, you are a sitting duck for bank salespeople. As a captive audience, they will try to sell you all kinds of add-ons, such as life insurance, home insurance, health insurance and so on. However, these policies are almost always Don't Buys, not Best Buys, so don't be taken in by the hard sell. Always buy your life insurance from an independent source, such as a whole-of-market broker or adviser.
3. Ignoring cover from your employer
There's no point in insuring your life for more than you need. Otherwise, these extra premiums really will be `dead money'. So, when calculating how much you need to leave to your dependants, be sure to include any `death-in-service' cover provided by your employer. Typically, this will be worth three to four times your basic salary before deductions. However, remember you will lose any death in service cover if you leave your employer.
4. Not using a trust
I call Inheritance Tax (IHT) `a bill which arrives after you depart'. If the value of your assets on death exceeds a certain level, known as the nil-rate band, then any excess over this threshold is taxed at 40%. In the 2008/09 tax year, the nil-rate band is £312,000, so only about one in sixteen estates (6%) pay any IHT. However, to steer clear of this final tax bill, you should put non-mortgage life-insurance policies into trust. This will keep your life-insurance payout separate from your estate, avoid IHT and probate, and speed up payment to your beneficiaries.
5. Choosing the wrong policy
Once you've established that you need life insurance, and have a sum in mind, then don't mess things up by choosing the wrong policy. For example, to cover the balance of a repayment mortgage, you need `decreasing-term insurance' (often called mortgage protection), the payout of which falls over time. Likewise, to pay out a fixed, level amount to your family when you die, you need level-term insurance.
Another big mistake is to buy a single `joint life, first death' policy to cover two people. It's more flexible (and can even be cheaper) to buy two separate `his and hers' policies. Indeed, this could mean getting two payouts instead of one. Finally, don't forget to insure a non-working spouse, as his/her support around the home would be very expensive to replace.
To sum up, life insurance provides priceless peace of mind, but only to those people who have done their homework carefully!
More: Get quality quotes for life insurance | How Much Life Insurance Do You Need? | What To Do Before You Die
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Some good advice on taking two separate 'his' and 'hers' policies. I found there was little difference in premium for two separate polcies. Two for the price of one, you might say.[br/][br/]I am not a fan of decreasing cover either. Whilst in theory you don't need level term for a repayment mortgage, I have often found the premium levels are comparable. My personal approach is to insure my life until my chosen retirement date on a level term policy (increasing with RPI) for one amount with one policy. This covers my mortgage and leaves my dependents comfortable. And all for the princley sum of £20 pounds a month! To take out two separate policies, one for the mortgage and one for the rest, just did not make sense to me, financial or otherwise.
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When calculating the amount of cover required don't forget most types of credit such as cards, loans and personal finance also have their own insurances (eg payment protections)which you have to take out. Check your paperwork to see what they cover and take that into consideration. [br/][br/]If you have no payment protection or ones that don't cover death then you will need enough insurance to cover paying these off too to save those you leave behind from the stress of dealing with it! [br/][br/]From my own bitter experience also make sure someone you trust knows about these arrangements as it can save a lot of additional distress.
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[i]...although you can leave assets to another person, your debts die with you. [/i][br/][br/]No they don't. Any debts that remain outstanding on death are payable out of your estate.
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08 August 2008