Whatever you do, don't fall foul of these life insurance mistakes...
1. Assuming life insurance is expensive
According to a recent report by Aviva, on average, 61% of families admit they don’t have basic life insurance, with 89% saying they are without critical illness cover, and 89% without income protection.
What’s more, 42% of families admit they’ve been seriously affected by illness and yet still don’t have any cover in place!
But if you care about your family’s well-being and you want to ensure your family won’t lose their home should something happen to you, make sure you have a life insurance policy in place.
If you think you can’t afford it – 19% of people in the survey said they didn’t have cover because they thought it was too expensive – think again. Life insurance can cost from as little as £5 a month, so there’s really no excuse.
2. Believing life insurance never pays out
The Aviva report also revealed that 5% of people believe life insurance never pays out. Again, this is untrue. According to Aviva, 99% of life insurance claims are paid out.
As long as you’ve provided accurate information, there should be no reason why your insurer won’t pay out.
3. Under-insuring your life
Of course, although your insurer should pay out, there's a chance the sum of money your family receives won't be large enough. Judging how much life cover you need can be tricky and what might sound like a lot of money now, may not work out to be much later down the line. As a result, it can be very easy to under-insure your life.
Many of us think we only need to cover our mortgage costs, but if you want to ensure your family would have a reasonable standard of living should the worst happen to you, you should also consider other debts such as household expenses.
For an easy way to work this out, check out this nifty calculator.
Jane Baker explains why life insurance should be your number one financial priority
4. Not updating your details
If your circumstances change – perhaps you’ve increased the size of your mortgage, or had a baby - you need to update your policy and apply for additional cover. If you don't do this, you risk being under-insured. Read Eleven reasons why you need more life insurance for more information.
The same goes for personal details such as your health - in some cases you could see your premiums come down as a result!
In fact, recent research from Sainsbury’s Finance has revealed that around 3.3 million ex-smokers in the UK are collectively paying £316m a year too much for their life insurance premiums because they haven’t told their policy provider they’ve quit.
So if you’ve given up smoking and haven’t used nicotine replacement products in the past 12 months, make sure you tell your provider as you should be classified as a non-smoker and this will lower your premiums.
5. Choosing the wrong type of policy
It’s also pretty easy to choose the wrong type of life insurance policy. Life insurance policies come in all shapes and sizes, leading to confusion.
The most widely used policy is level term assurance. If a claim is made during the term, this plan pays out a cash lump sum to your family (or any other beneficiary you choose). The sum you’re insured for stays the same for the duration of the term.
You could also consider increasing term assurance which provides cover that increases over time to combat the effects of inflation. Although this sounds good, be warned that the premiums will be higher than a level plan due to the cost of inflation-proofing. So you need to assess carefully whether this benefit is worth paying for.
If you’re really worried about money and you need to keep the cost of life insurance to a minimum, you could consider a decreasing term assurance policy instead. This is cheaper because the cover reduces over the term in line with your outstanding mortgage debt. So this type of cover will pay out just enough cash to cover your outstanding mortgage whenever you make the claim.
You can find out more about the different types of policies in Get the right life insurance for you.
It’s also worth noting that choosing a joint policy usually works out to be cheaper than buying two single policies, but isn’t necessarily the best option. A joint policy won’t give either of you as much cover as two single policies would because a joint policy will only pay out once – when one person dies.
Two policies, on the other hand, will pay out twice – when each of you dies – so you’re getting double the protection. And this is particularly important if you have children.
6. Not setting your policy up in trust
If you want to ensure the pay out from your life insurance goes to the right people when you die, make sure you put your policy in trust. Fail to do so and your policy will automatically become part of your estate. This means it will be subject to inheritance tax. However, if it is written in trust, it won’t form part of your estate and is more likely to be exempt from inheritance tax.
Putting your policy into a trust should also speed up the process of getting money to your beneficiaries.
John Fitzsimons looks at three simple ways to cut the amount you spend on your life insurance.
7. Failing to shop around
Although I've saved this one until last, one of the biggest mistakes when it comes to life insurance is not shopping around for the best policy. I’ve already explained why the cheapest policy might not be the most suitable, but it’s still important to shop around to ensure you’re getting a good deal. You can easily do this with the lovemoney.com life insurance centre.
Avoid buying a policy from your bank or other mortgage lender because these policies are likely to be more expensive.
As a final point, it’s also worth thinking about taking out critical illness cover as well as income protection insurance for additional protection. You can find out more in Three essential ways to protect your family.
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