5 silly life insurance mistakes
Don't get caught out by this silly mistakes.
Life insurance is a crucial financial product for many of us, yet we are still liable to make daft mistakes when arranging our cover. Here are five particularly silly mistakes we should all endeavour to avoid.
#1 - Ditching your policy
Money is seriously tight for many of us at the moment. According to the financial information firm Markit, 40% of households saw their finances deteriorate between July and August, and with the cost of living likely to continue to rise, every penny counts.
As a result, it can be tempting to ditch your life insurance policy, to save a few quid every month.
Of course, not everyone needs life cover anyway. If no-one will lose out financially as a result of your passing, then life insurance is unnecessary. However, if you have a partner or kids who will miss out as a result of your monthly salary disappearing, then it’s not just important, it’s essential to have life cover! Read 5 people who need life cover for more.
And what’s more, it doesn’t have to cost you a fortune. As I explained in Your phone and your cat are more important than your life you can get cover for less than £10 a month – absolute peanuts!
#2 – Lying on your application
It can be tempting to tell a few porkies whenever you apply for any financial product, perhaps bumping up your annual salary a little bit when going for a credit card for example. This is not a clever thing to do as it will backfire on you if you can't afford your debts. But lying about your medical history when taking out life insurance is in a completely different league of stupidity.
If you opt to leave out some aspect of your medical history, which then plays a part in your death, this is bracketed as a ‘non-disclosure’ and invalidates your cover. So not only will your loved ones have to cope without you, they’ll also have to cope without a payout from your policy - despite all the money you've paid in premiums over the years.
The onus is on you, the applicant, to be open about your medical history – it’s just not worth taking the risk of fibbing, for the sake of saving a few pennies on your monthly premiums.
#3 – Buying joint cover
It can seem sensible to get joint life cover with your partner. After all, chances are your mortgage was taken out jointly, and you may even have a joint bank account for bills. And joint cover will result in smaller monthly premiums. So why is it a bad idea?
However, if we each took out separate policies, then claiming on my death doesn’t affect her cover – should she then die within the 35-year term, my son can then claim on her policy. Effectively, the family would get a £300,000 payout on the two policies, rather than just £150,000 on the single, joint policy.
For two 30-year old, non-smokers, to get £150,000 cover for 35 years would set them back as little £20.28 for separate policies, while joint cover would come to around £15.85. Sure, it costs a few extra pounds a month, but with the separate policies you’re effectively getting double the cover.
#4 – Not writing it into trust
If you die early enough that your family will need to claim on your life insurance policy, you want to ensure they get that payout as quickly as possible. However, by failing to write your policy into trust, you risk leaving your loved ones to do just that.
That’s because your life insurance payout will be counted as part of your estate. So if you die in a wealthy enough position where you will have to pay Inheritance Tax, it could take months before your family get the payout, and even then it will have been taxed!
But write that policy into trust, and it is treated as a separate entity to your estate, meaning your family gets the money quicker, and won’t have to pay any tax on it. For a great guide to writing policies in trust, check out Save your family thousands in taxes.
#5 – Never updating your cover
Having your life insurance policy in place doesn’t mean that the potential for mistakes is over. In fact, just leaving your policy alone once you’ve taken it out could be the biggest mistake of all.
Life insurance policies cover you for a long time. As a result, your circumstances are bound to change. And your policy may need to change to reflect that.
For example, when I took out my life insurance policy a couple of years ago, I took out enough cover to pay off the mortgage so that my wife wouldn’t have to deal with it on her own. But now we have a little boy, so if I die, I’d like to ensure that not only the mortgage is paid off, but also there is some money there to pay for his University costs, or first car, or whatever. As a result, I need to consider increasing my level of cover.
Similarly, if you move to a bigger, more expensive house, you’ll need to consider whether you have enough cover in place to help your loved ones should the worst happen.