Life insurance serves your family by helping with the financial burden that can accompany the loss of a loved one. For that reason, it is important to seek independent advice, and put a little planning into setting up your life policy. Here are the key aspects to consider – the ‘do’s’ and ‘don’ts’ of buying life insurance.
DO consider what your life insurance is intended to do
There are two main purposes in buying life insurance: to pay off your mortgage, and to provide for your loved ones when you die. If paying off your mortgage is the priority, a term insurance may be the right choice. The value of the cover decreases over time (the term) in step with the falling balance due on your mortgage, and the life policy expires when your mortgage is paid off. For a payout that is not related specifically to your mortgage, but should go to your family upon your death, choose whole of life insurance.
DO consider carefully how much life cover you need
When buying life insurance you should take a moment to consider how much cover you need. One method is to calculate your total debt (including mortgage) and adding 20 times your annual income. If you can take this level of insurance cover, your debts would be cleared, and the remainder invested at 5% per annum would replace your salary for your family.
DO consider setting up your life cover in trust
When taking out life cover, ask your financial adviser to set it up in trust. This will ensure a smooth and speedy payout to your family, and can also minimise the risk of your insurance being hit by Inheritance Tax at 40%.
DON’T opt for the cheapest deal without advice
Some budget life policies have reviewable premiums which are set low to lure you in, but can be rapidly adjusted upwards. In the longer term, a guaranteed premium, which cannot change, may be best.
DON’T ignore the small print
Ask your adviser to interpret the terms and conditions of the life policy you are considering. Each company has its own quirks and as the old saying goes, the devil really is in the detail. Ensure your adviser checks your application form too one missed detail or accidental omission could invalidate a later claim.
DO consider guaranteed insurability options
These options allow you to increase your life cover as you progress through life. You may wish to do so if you start a family, for instance.
DON’T forget to check for terminal illness benefit
Life policies with this option will pay out your life insurance early, if you are diagnosed as having 12 months or less to live.
DO consider two single plans rather than joint cover
If you are a couple, two single plans can be better than a single joint policy. A single life policy is often set up on a joint life first event basis, so that it pays out on the death of the first partner, and the policy ends. This leaves the second partner, if they desire new cover to secure the wellbeing of their children, seeking insurance at an older age and, perhaps, in less than perfect health. This could be much more expensive than having two single policies from the start.
DON’T limit your choice to one insurer
When buying life insurance, choose an independent financial adviser who is not limited to the products of one insurer. He can compare all policies for you by taking a whole of market approach.
DON’T trust the information available online
Buying life insurance online can be a virtual minefield. Providers hurrying to get a quick quote back to you often base their price on certain assumptions about your situation. Furthermore, buyers often do not understand the terms of the life policy they are considering.
DO shop around on a regular basis
The cost of life insurance is constantly reducing and it may well be that, even though you are older now, you could still cut the cost of your existing cover by having your adviser compare the latest deals.
DON’T forget your healthy lifestyle
Your insurance may be cheaper if you can demonstrate a healthy, active lifestyle. Avoid being overweight, cut out smoking and alcohol, and take regular exercise but avoid extreme or dangerous sports. Cheaper cover is now also available for vegetarians, as they are deemed to be less at risk from cancer.
