Life insurance is one of the most effective ways to protect your loved ones, in the event the worst happens to you.
Unfortunately, it’s easy to make costly mistakes with life insurance – paying thousands more than necessary, often for features you do not need.
It’s important to bear in mind that there is no single type of life insurance. Some types will cover your children, for instance, whilst others will be primarily concerned with your mortgage.
In this article, we’re focusing mainly on the former type. This is the kind of insurance most of us need to think about, whether we are a parent, a spouse or partner.
So, here are 7 crucial tips to consider when thinking about this kind of insurance:
#1 No Dependents? You Don’t Need It
If you are on your own, and have no children or dependents to look after, why get insurance?
It’s worth stating early on. After all, if there’s no one around relying on your earnings, then it’s almost certainly not a type of insurance you need to think about.
One question to ask yourself is: “If I died suddenly, what would be the financial repercussions on the people I care about?” If the impact would be minimal, then you’re likely OK.
#2 Joint vs. Single Policies
If you are in a couple, then you can sometimes get a couples policy. Or, you can both opt for separate single policies.
Sometimes, the former kind of policy will be cheaper than the latter option. However, there will usually only be a single payout. If the second person then also dies within the term, it’s very unusual for there to be a second payout.
This might not matter, however, depending on your circumstances. For instance, if you are married and without children, a second payout might not be needed.
Two single policies may be more expensive, but they should grant two payouts.
#3 The Lower The Risk, The Cheaper The Policy
As with most kinds of insurance (e.g. car insurance), the more likely you are deemed to need the payout within the policy term, the more costly it is likely to be.
If you are a smoker, for instance, then this can increase the price tag. The same logic applies if you have poor health, or if you are older.
Whatever your circumstances, the important thing if you do not hide anything from your insurer when you are applying.
If you downplay risks, hide things or outright lie, then your insurer could later refuse to pay out during a claimon the grounds of “non disclosure”.
So, if you were planning on stopping smoking prior to reading this, here’s an extra reason – the potential for cheaper life cover!
#4 Quantities Matter Too
This is similar to the point above, and is fairly straightforward.
The more years you want your policy to last, the more expensive it is likely to be.
The same logic applies to the amount of cover you want. For instance, if you want a potential payout of £500,000, then your policy will be pricier than if you wanted it to be £100,000.
When deciding how much cover to take out, at the very least you should consider:
● Likely future spending (e.g. financial support for children going to university)
● Costs associated with death (e.g. covering the funeral)
● Debts that need settling, including your mortgage
It’s usually a good idea to overestimate how much you will need. Inflation will erode the value of the payout sum, for instance, over a 10-20 period.
#5 Protect Your Policy From The Tax Man
Not many people realise that a life insurance payout becomes part of your estate. So, it is potentially liable to inheritance tax when you die.
If you want to avoid this happening, then one option is to write your policy in trust – simultaneously as you take out the policy.
What this means is, your insurance payout does not go to you. Rather, it goes directly to your named recipients. So your policy does not actually become a part of your estate.
We’d recommend speaking with a professional, qualified financial adviser to help you with this if you are considering this option.
#6 If Your Insurance Company Fails…
A lot can happen over the span of one or two decades.
One possibility is that you insurer goes bust, and so it’s important to know what the next steps are should this be unfortunate enough to happen.
Under the current rules in the UK, if this happens to your provider, then the FCSC (Financial Services Compensation Scheme) will arrange a new replacement policy for you.
#7 Fix The Monthly Cost
Quite often, you will be presented with two options when taking out life insurance.
One option fixes the price of the premiums over the course of the policy. So you know exactly what you will be paying, month by month, over the span of it.
The other option gives you reviewable premiums. This might give you cheaper premiums at the beginning of the policy, but in all likelihood they will push up the premiums later on.
Our advice: go for the former, and avoid the latter.