Finding the right life insurance or other protection can sometimes feel like a minefield. With dozens of insurers, a range of different types of policy, and as assortment of premium and payout types, it’s easy to be confused by the choice.
From not shopping around to taking inadequate cover, there are several common mistakes that people make when taking out insurance. These errors could end up costing you dearly in the future.
So, to help you, here are seven common mistakes people make when it comes to life insurance, and how to avoid them.
1.Not comparing the market
There are presently dozens of life insurers in the UK. From huge multinational providers down to smaller friendly societies, there is strong competition when it comes to putting the right protection in place.
But how do you know which is the right provider for you?
It’s easy to walk into your local bank or building society and arrange cover. You may also have an existing relationship with an insurer – perhaps because your pension or existing policy is with them?
However, taking this approach is likely to mean you’re paying more for your cover than you need to.
Shopping around can help you obtain the cover you need for less. We work with dozens of the UK’s leading insurers to compare prices, meaning you’ll always benefit from a competitive premium for the protection you need.
Even if you already have cover in place, it’s not too late to save money by shopping around.
Many financial advice firms charge “loaded premiums” for products such as life insurance. A “loaded premium” is an additional percentage fee charged on top of the standard premium, which typically goes to the organisation who arranged your cover.
Roger Edwards, former managing director at insurer Royal London, said that loaded premiums were like "buying a concert ticket and then paying a £6 admin fee on top".
If you took your life insurance out through a third party – perhaps the firm who arranged a mortgage for you – then you might be paying significantly more than you need to.
For example, if the standard monthly cost of your life insurance was £25, a loaded premium could see you pay an additional 20% each month – adding £5 to your monthly premium. Over the course of a 30-year policy, this loaded premium means you’ll pay £1,800 more than you need to.
Rather than charging a loaded premium, we actually take less than the standard commission from insurers in order that we can reduce the premium you pay. Over the term of a policy, shopping around with us could therefore save you a significant sum.
2.Not taking out the right cover
Protection is about much more than life insurance. You also need to think about what you would do in the event of a terminal or critical illness, if your child were seriously ill, or if you were unable to work through illness or injury.
When reviewing your protection, it’s essential that you establish exactly where the gaps are in your existing cover.
For example, if you’re self-employed than it may be important that you put income protection in place, to ensure you can continue to pay your bills if you were unable to work after an accident.
3.Not putting your policy in trust
Recent research from MoneyAge revealed that, in 2018/19, more than 6,000 estates paid Inheritance Tax (IHT) on life insurance policies which could have been excluded if their policy was written into a trust.
More than 6,000 estates paid an estimated £280 million of IHT on the proceeds of life insurance policies. However, if these had been written in trust, they would normally not have formed part of the deceased person’s estate and so would not have been liable for IHT.
There are many good reasons to put your life insurance in trust, not just because it could reduce a potential IHT liability:
- You can keep control over how your assets are distributed when you die
- Your loved ones will typically get access to the payout quicker.
Putting your life insurance in trust is easy, and we can help you to do that when you set up your policy.
4.Not understanding the product
When you take out any protection product, it’s important that you understand exactly what is covered – and what isn’t.
Providers will issue you with documentation clearly showing what your policy covers and excludes, whether any waiting (or “deferred”) periods apply, and how your premiums will be paid.
For example, not all types of cancer may be covered under a Critical Illness policy. Or, if you engage in risky hobbies, you may not be covered if an accident occurs while you’re participating in these.
Make sure you understand the policy so you don’t later have a claim refused.
5.Not being honest with your information
Despite what many people think, insurers overwhelmingly pay protection claims. Across all protection products, the Association of British Insurers (ABI) say that providers paid 98% of claims in 2020, totalling more than £6 billion.
The most common reason that an insurer wouldn’t pay a protection claim is for “non-disclosure”. This is where you fail to provide honest information on the proposal form when you take out the cover.
For example, you might say that you were a “non-smoker” when you actually did smoke. You may also fail to divulge details of previous symptoms or medical conditions you had.
If you fail to disclose an existing medical condition you put yourself at risk that the insurer might deny a claim in the future. This could leave you and your family in a difficult situation if the payout they were expecting does not materialise.
Always be completely honest and up-front on your application form when you apply for cover.
6.Not having enough cover
Many people we speak to think they might have enough protection already. They may have “death in service” benefit through their employer, some existing life insurance they took out years ago, or believe that their employer’s sick pay would be sufficient for their needs if they were ever off work.
In all these scenarios, it’s highly likely that there will be protection gaps.
Not having enough cover means your loved ones could be left with debts after you die. They may not be able to maintain their mortgage/rent payments or their lifestyle if you’re no longer around.
Furthermore, the Statutory Sick Pay rate in the UK in 2021/22 is just £96.35 a week. Could you afford to live on that if you were unable to work for a long period due to an accident or ill health?
We can help you to establish exactly how much cover you need to make sure you’re adequately protected. Our life insurance calculator is also a good place to start as it can help you think about just how much protection you might need.
7.Not working with an expert
As you read above, if you don’t shop around for life insurance and protection then you could end up paying much more than you need to. So, working with an expert can help you to find the right cover at the right price.
We have wide experience in helping clients to obtain the peace of mind they need. We work with dozens of the UK’s leading insurers, which means we can scour the market for the best rates. We can also help you if your situation is a little out of the ordinary – for example, if you have a pre-existing medical condition.
5 things science says can help slow the ageing process and help you to live longer
November 16, 2023
Almost half of those planning a funeral were “stressed by the cost” – here’s what you can do
November 9, 2023
Revealed: The 5 most important things you’ll consider when buying health and life insurance
November 2, 2023
Dementia – here are the symptoms to look out for and how protection can provide valuable support
October 26, 2023
2 in 3 adults worry about money – here are 3 useful ways to reduce your financial stress
October 19, 2023
5 easy steps to finding the right life insurance for you
October 12, 2023