Life insurance is essential for many of us. If you have loved ones who would struggle to cope financially in the event of your death, it’s a necessary purchase. We don’t want to get too morbid, but according to national statistics, nearly one child in 20 loses a parent before they’ve finished full-time education.
- Don’t buy a policy you don’t need
- Take insurance as early as you can
- Buy online
- Remember your life insurance policy doesn’t need to be for life!
- Consider getting ‘decreasing’ term insurance
- Avoid ‘joint life, first death’ policies
- Be careful if you get combined life and critical illness cover
- Don’t pay unnecessary tax
- Don’t smoke
- Only cover yourself as long as you need
Of course everyone wants to protect their family – but unfortunately, insurance brokers often take advantage of this natural instinct to sell people insurance they don’t actually need. So how do you avoid being ripped off by life insurance companies?
The main purpose of life insurance is to cover the wellbeing of your dependents in the event that you (to use industry parlance) snuff it sooner than you had anticipated.
It is used for things like:
- Covering your mortgage payments that your partner could be liable for if you died
- Supporting your partner if they don’t or can’t earn an income of their own
- Ensuring financial security for your children.
But if you don’t have any dependents who rely on your wages to get by, getting life insurance is usually pretty pointless.
If you think it likely that you will have dependents in the not too distant future however (for example you are planning to start a family) it can make sense to start getting life insurance now. Because the younger you are, the cheaper it is.
Someone who starts paying in their 20s will have premiums roughly half the price of someone who starts life insurance when they’re over 40.
It pays to start early…
Someone taking out life insurance cover aged 25 might expect to pay in the region of £6 a month for their premium.
Someone who doesn’t take out life insurance until they’re 40 could easily pay double that.
So – even allowing for the fact that the 25 year old has been paying life insurance for 15 more years than the 40 year old – the 25 year old will still end up paying less in cover.
Say both the 25 year old and the 40 year old lived until they were 80.
The 25 year old would have paid £3,960 for his life’s cover in total.
The 40 year old, on the other hand, would have paid a hefty £5,760.
Comparison sites are your friend when it comes to life insurance. They’re much cheaper than going direct to insurance providers or through an independent financial adviser.
We use Money-minder for our life insurance comparison service. We recommend it because:
- It compares policies from across the market in an easy to understand manner
- Their life insurance calculator is really useful and most importantly, free! It lets you work out exactly how much cover you need just by answering some simple questions
- Unlike some other comparison sites, Money-minder won’t phone you unless you specifically ask them to. No annoying sales calls!
If you only take one thing away from this article, make sure it’s this: you don’t have to stay with the same insurance provider forever. There’s no need to unquestioningly pay the premiums sent to you year in, year out – though all too often that’s what people do.
The market is always changing, so should a better deal come up – switch!
If you took out your policy relatively recently (i.e in the last few years) and your health has not deteriorated in the meantime, you will often find a better deal can be had – just like with car or home insurance. Prices can change wildly due to market competition, so it’s always worth checking what the state of play is each time your premium comes through. You could save yourself a tidy packet from just 20 minutes spent on an online insurance comparison tool.
You should be able to cancel your existing policy without facing a penalty. (Just make sure you have a new policy in place before terminating your current one.)
Often the main concern of people taking out life insurance is to cover the mortgage.
If you have a repayment mortgage, getting ‘decreasing’ term insurance can make a lot of sense. A decreasing policy takes into account how much of your mortgage is paid off. The more that is paid off, the lower your premium becomes (as there are less repayments for the insurer to cover should you kick the bucket).
After all, why pay for premium insurance that will cover a £100,000 mortgage when, after 30 years, you could only have £20,000 left to pay off? A decreasing policy takes this into account and gives you cheaper payments over time.
However if you have substantial non-mortgage related debts and costs, decreasing term insurance is probably not for you. It’s also not a cost-efficient move if you think it’s possible that you may move to a bigger house and mortgage sometime in the future.
A joint life policy pays out if you or your partner dies. However, it only pays out once – leaving the survivor uninsured. For just a few pounds more, you and your partner could take out separate life insurance policies. This means that you get two pay outs and twice as much cover. This leaves both the survivor insured, and ensures that any other dependents (for example, your children) are better protected.
Another advantage to taking out separate policies is that they make dealing with inheritance tax less of a headache. Also, should you separate or divorce from your partner, the process of dividing up a joint policy can be a real pain.
The trouble when you buy combined life and critical illness cover – which many people do – is that you’re often only able to make a claim once.
So once you’ve made a claim for critical illness, the policy ends. You immediately lose the life cover which was included in the same policy.
To make matters worse, arranging a new life insurance policy at this point could be very costly – since your health will have deteriorated after suffering a critical illness. You may find it has become impossible to buy replacement life cover at an affordable price.
You can avoid this by having separate critical illness and life insurance policies, allowing you to make two separate claims.
Although life insurance pay-outs are tax-free, if they are arranged so they form part of your estate, the money you get could be liable for inheritance tax. Which means that as much as 40% of your pay out could get taken by the tax man.
You can normally protect your pay out from inheritance tax by putting your plan ‘in trust’. This means that the pay out goes straight to the people you choose, rather than becoming a part of your estate when you die (so avoiding inheritance tax).
It will also mean that your dependents will receive the pay-out more quickly and easily.
Your insurer or broker can advise you on what sort of trust is best for you, and will usually set it up for you for free.
This is an easy way to avoid getting ripped off. Life insurance policy costs go up steeply if you smoke – often to the tune of thousands of pounds. So if you can, quit. You’ll not only save thousands on your life insurance, you’ll also save a tidy sum through the money normally spent on the habit itself.
You’ll want to cover yourself until your normal retirement age of 65. After that, it depends on your circumstances. If you have a young family, you’ll want to ensure that your children are covered until they can be financially independent. But there’s probably little use in you paying for a policy that covers you until you’re eighty or older, as your kids will have long since flown the nest – and you will hopefully not still be working. So there’s no point buying a policy covering you until this point, because you will essentially be paying money for nothing.