Getting the right life insurance product can seem baffling.
But the secret to getting a watertight policy doesn’t have to be complicated. It’s a question of taking a look at your circumstances and understanding your product choices.
Here we’ll set out what you should – and shouldn’t – do.
Mistake 1: Choosing the Wrong Type of Life Insurance Policy
The first choice is the type of policy. You can choose level term life insurance, whole of life insurance or mortgage decreasing term insurance. What’s the difference? Understanding this is your first step to getting the correct product.
Whole of Life Policy
With a whole of life policy, the insurance lasts until you die. You pay in a premium every month and when you die, the policy pays out the lump sum to your chosen beneficiaries.
Most people choose this type of policy to help them cover the expected inheritance tax bill on death.
Level Term Policy
With a level term policy, the payout amount will not change. You set the sum, say £300,000, and the number of years, say 25. With this, you (effectively your dependents) only get the payout if you die within the term period.
Unsurprisingly, level term life insurance is cheaper than whole of life insurance. If you do decide to opt for a whole of life policy, check if you have premiums guaranteed for life.
For most people with young families, level term life insurance is more affordable and may better meet your needs.
Mortgage Decreasing Term Insurance
Mortgage decreasing term insurance does what it says on the tin. As your mortgage debt decreases, the insurance pay out does too. This insurance won’t offer your dependents a lump sum pay out. But it will cover all your mortgage obligations should you die before it’s paid off. This is almost always the cheapest form of Life Insurance, but of course it offers the lowest level of cover.
To make sure your family is protected if you are no longer there to provide an income, then a level term life insurance will provide them with greater protection than a decreasing term policy; although the level term policy will typically cost more in monthly premiums. One advantage of choosing a level term policy is that you can combine covering your mortgage debt with your family’s future financial needs.
Mistake 2: Not Estimating the Cover You need Accurately
A lot of people simply dream up a large figure for their cover without doing their sums. It’s often best to get financial advice to make sure you’re really meeting your dependents’ needs.
What should you factor in?
- How much is your mortgage repayment? This is likely to be your biggest outgoing. Include enough cover for both capital and interest payments for its duration.
- Do you have other major loans such as for a car or home improvements? Add these to your list.
- How much will education for your children cost? You may be covering school fees or anticipating university expenses. Add these to your list.
- What is your salary worth? Most experts advise covering at least 10 x your annual salary if you’re the main earner until your children have completed their education. So if your salary is £35,000, you should be anticipating needing £350,000 cover.
- What kind of funeral would you wish for? The average cost of funeral in the UK is £4,271 but can be much higher depending on where you live and closer to £6,000 in London. 
Add each of these figures up. Everyone’s circumstance is different. But using these five pointers as a guideline will help you determine your final cover figure.
Mistake 3: Not Considering Two Single Policies
Are you in a relationship or married? You have the choice of buying either a joint policy or two single policies.
A joint policy will usually be slightly cheaper than two single policies. But you will only get one payout at the time of the first death. So, if you have no dependents, a joint policy can make more sense.
But what if you have dependents and your relationship ends with your partner? Then you would face having to buy a new single policy later in life when it will cost you more. In this case two single policies may make more sense.
A further alternative could be to purchase a more specialist joint policy which would cover each partner’s life separately. In this type of policy the surviving partner continues to be covered even after the death of their partner. Our Life Insurance Advisor can give you more information on this type of policy.
Mistake 4: Not Opting for ‘Guaranteed Premiums’
The main point of life insurance is security. Whatever the type of insurance you opt for, having reviewable premiums removes some of that security. It will mean your insurer is likely to steadily increase their cost over the term of the cover. It’s certainly cheaper to opt for reviewable premiums when you first take out the cover as the policy will be cheaper. But you’ll be likely pay more later.
Mistake 5: Not Writing Your Life Insurance Policy in Trust
The standard Inheritance Tax rate is 40% in the UK if the value of your estate exceeds £325,000. So, you’d be right to do all you can to avoid your dependents being saddled with a huge bill.
The best reason for setting up your life insurance policy in trust is to avoid inheritance tax. Assets in trust are not seen as part of a deceased person’s estate for tax purposes.
When you take out your life insurance policy, most providers will include the option (and papers) for writing in trust directly at no extra charge. Doing this is a non-brainer. It will also speed up the pay out for your beneficiaries, enabling them to pay off your remaining liabilities (e.g your mortgage) much more quickly.
Everyone’s situation is different and choosing the right policy can be bewildering. To ensure you have all needs covered, it’s well worth taking professional advice on life insurance.
Do you need more information on the life insurance explanations here? Or would you like talk over your circumstances? We’ll be happy to help you here.