A Life Insurance policy is a must if you have a family who would struggle financially if you were to die. It means that funeral costs could be covered, the mortgage paid, and that your family would still have some financial support even though you are gone. However, when it comes to purchasing a Life Insurance policy it’s important to know the pitfalls to avoid to stop you making a costly mistake!
1. Watch Out For Low-Start Policies
These are the cheapest of policies and are top of the list on price comparison websites.
If you’re wondering what the issue is here, the clue is in the title: ‘Low-Start’. That’s right – that low low price that’s got you all excited won’t last for the duration of your policy.
Your monthly premiums will increase throughout the term, and so despite having a couple of years of cheap monthly payments in the beginning, it could end up costing you more over the full term than it would have done if you had taken out a term life insurance policy, where the premiums will stay the same.
These types of policies are a ‘last resort’ policy typically taken out by smokers who are trying to give up, or overweight people trying to improve their health and know that their premiums on a normal level term policy might be too high.
A low-start policy can be a good starting point in that they can enjoy the cheaper premiums in the very beginning until they have quit smoking or lost weight and can get more reasonably-priced level term insurance.
2. Two Policies Are Better Than One
If you are a couple it’s possible to get a policy that covers both of you, or two single life policies.
A joint policy can pay out when one of you has died, or after you have both died. Which leads to some difficult decision making; if it pays out after one of you dies then the money can be left to the surviving partner to help with the mortgage and funeral costs etc.
However, if the surviving partner were then to die without any extra insurance there will be nothing left behind for loved ones – something to think about if you have a young family.
Because the joint policy ends when one of you dies, the surviving partner would then have to take out their own single life insurance policy, which would be more expensive now due to being older than when they took out the joint policy.
However, If the policy pays out once you have both died the money can be used to pay an inheritance tax bill – but then of course there will be no pay out after the first person dies to offer financial support to the family.
This is why two may be better than one. Two individual policies are often a very similar price to a joint one, and if you were both to die during the policy there’ll be two payouts to your family.
They also offer more flexibility, as the money will be distributed according to your will or Trust, whereas a joint policy will pay out to your surviving partner – important to know if you have a joint life insurance policy with someone and are no longer together!
3. Avoid Reviewable Policies If Possible
If you find a Life Insurance policy at a mouth-wateringly low price, then check if it’s a reviewable policy.
What’s a reviewable policy?, I hear you cry. Well, instead of your monthly premiums staying the same, as they would with a ‘guaranteed’ policy, the low premium is only set for the first few years (normally the first 5 or 10).
After that it will be repriced, and rises a lot as you get older. This means the premiums may become unaffordable in later life.
Personally, I can’t think of a reason why you would take out this kind of policy unless, again, you are a smoker trying to quit etc and want to eventually switch to a level term insurance policy.
4. Full Disclosure Is Essential
The top reason that Life Insurance policies don’t pay out is policyholders withholding important health information when they apply.
If you have a pre-exisitng medical condition you can get Life Insurance, it’s just it might cost you a little more. Which, yeah, is a pain, but not as much of a pain as it will be to your family if you die from said condition, and your policy doesn’t pay out because you didn’t tell the insurance company about your medical history in order to save a few quid.
The same applies to lifestyle choices. If you are a smoker and pretend not to be so that you can get cheaper monthly premiums, and then after you die it’s discovered that you in fact were a smoker, again, the insurer might not pay out.
It’s worth knowing that most insurers will lower your monthly premiums after you have quit smoking for a prolonged period of time (12 months), or have lost weight etc – which could be an extra incentive to making some lifestyle changes – presuming that not wanting your family to have to make a claim on that policy any time soon isn’t enough!
5. Remember That You Can’t Renew
When the term of your Life Insurance policy ends, that’s it – it’s not like car insurance where you can just renew your existing policy – you’ll have to take out a whole new policy. So if you took out a short term policy because it was cheaper, you’ll now have to take out another one.
Doesn’t sound like a big deal, but don’t forget that now you are older and your health could have deteriorated. This means it will be more expensive, or, worse, you could struggle getting insured at all.
6. You Can’t Always Change Your Policy Mid-Term
Unless you have something called ‘guaranteed insurability’ (the right to purchase additional insurance without undergoing a medical or having to provide evidence of good health), then you won’t be able to change your policy mid-term.
This means that if you have taken out a Life Insurance policy that only covers your mortgage for example to keep the premium costs down, thinking that you’ll change it at a later date to ensure there would be enough money for the kids and for day-to-day living expenses, tough, you can’t.
You will have to take out a whole new policy, except now you are older, and if there have been changes to your health etc you could run into the same problems as I mentioned earlier.
So there you have it, some of the things to avoid when looking at Life Insurance. Personally, I would always advise speaking to a financial advisor before you purchase a policy, as they’ll be able to answer any questions you might have and can help you find a policy to suit your needs.