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 then it’s a necessary purchase. But it’s essential to make sure you’re not ripped off by life insurance companies when doing so.
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. Insurance is often one of those things that provides peace of mind in case the worst happens. It hopefully won’t ever be needed, but in case it does, then the safety net is there.
Life insurance isn’t something that necessarily leaves our loved ones wealthy if we happen to pass away prematurely, but it can ensure important things like outstanding mortgage payments are more manageable for those left behind. Rather than them being left to find the full amount on their own.
But there are pitfalls to be aware of, here’s how to avoid falling foul of them.
- 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 insurance to people who don’t actually need it.
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 dependants in the event that you die sooner than expected.
It is used for things like:
- Covering your mortgage payments that your partner could be liable for once you’re gone.
- Supporting your partner if they don’t or can’t earn an income of their own.
- Ensuring financial security for your children and other dependants.
But if you don’t have any dependants, such as children or a spouse who may rely on your wages to get by, then getting life insurance can be pointless.
If you think it likely that you will have dependants in the not too distant future (for example you are planning to start a family), then it can make sense to consider getting life insurance. 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. Although most people take out life insurance once they buy a house, or apply for a joint mortgage.
It pays to start early
Someone taking out life insurance cover aged 25 might expect to pay an average of £7 a month for their premium.
Someone who doesn’t take out life insurance until they’re 40 could easily pay double that amount.
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 overall in cover costs.
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. While the 40 year old, on the other hand, would have paid a hefty £5,760.
Remember the cost of your premium, and how much you pay in doesn’t mean there’s more money in the pot for your loved ones if anything happens to you. Life insurance doesn’t work the way pensions do!
Comparison sites are very helpful when it comes to life insurance. They’re much cheaper than going direct to insurance providers or through an independent financial adviser (IFA). An IFA may actually sign you up to a provider that they or their employer is affiliated with. Remember they get a commission for doing so in many cases!
Always use a comparison site to double check.
We use Money-minder for our life insurance comparison service. We recommend it because:
- It compares policies from across the market in a way that’s easy to understand.
- Their life insurance calculator is really useful and most importantly, its free! It lets you work out exactly how much cover you need just by answering a few simple questions
- Unlike some other comparison sites, Money-minder won’t phone you unless you specifically ask them to do so. So don’t worry about entering your details, you won’t receive any annoying calls.
If you only take one thing away from this article, then 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. However more often than not, that’s exactly what people do.
The market is always changing, so should a better deal come up, then go ahead and switch! Your loyalty should always be to your bank account, family and yourself in this regard.
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 indeed be had. It’s the same principle as 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 significant sum from just 15 minutes spent on an online insurance comparison tool, such as the one provided above.
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 in case something happens down the road.
If you have a repayment mortgage, getting ‘decreasing’ term insurance can make a lot of sense. So what does this mean?
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 pass away). Basically, the policy moves with your mortgage.
Look at it this way, 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 debts and costs that are not related to your mortgage, then decreasing term insurance may 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. But it’s worth always keeping the idea in mind.
A joint life policy pays out if you or your partner dies. However, it only pays out once, leaving the survivor uninsured going forward. 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 the survivor insured, and ensures that any other dependants (for example, your children) are protected.
Another advantage to taking out separate policies is that they make dealing with inheritance tax less of a difficulty. Also, should you separate or divorce from your partner, the process of dividing up a joint policy can be complicated.
The trouble with critical illness cover is that you’re usually only able to claim it once.
So once you’ve made a claim for critical illness, the policy is essentially over. 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. Therefore you now may find it much harder buy replacement life cover at an affordable price.
You can avoid being ripped off by life insurance companies in this way by having separate critical illness and life insurance policies, allowing you to make two separate claims. If you have an existing policy then make sure this scenario isn’t a possibility.
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.
How to avoid this:
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 overall estate. This way it will be treated as a separate entity, free from inheritance tax.
It will also mean that your dependants will receive the pay-out much more quickly and easily, without many of the complications associated with probate.
Your insurer or broker can advise you on what sort of trust is best for you, and will usually set it up for you too for free.
We’re not telling you how to live your life, but this is an easy way to avoid getting ripped off by life insurance companies.
The average life insurance policy costs always go up steeply if you smoke, often to the tune of thousands of pounds. This is a fact, and it can be avoided by not smoking.
So if you can quit, then do so. And make sure you tell them you have. You’ll not only potentially save thousands on your life insurance premium, you’ll also save a 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. By then your children will have long since flown the nest, and you will hopefully no longer need to work.
Therefore there’s no point buying a policy covering you until this point, because you will essentially be paying money for nothing. Don’t get ripped off by life insurance companies, cancel the policy if this is the case.