Common life insurance mistakes to avoid

Hi, I'm Nicola McKenzie, founder of Dun & McCarthy Financial Services, and in today's video, I will be explaining some of the most common mistakes that people make when arranging their life insurance policies. And I'm telling you this so that you can avoid making the same mistakes. So stay tuned to hear more. So before we get into today's video, I want to let you know that here at Dun & McCarthy, we specialise in helping people to arrange life insurance. We deal with lots of different insurance companies, from the likes of Aviva and legal and general companies that you'd be familiar with, to more specialist insurers. And the best part of all is that our insurance review service is completely free of charge. So whether you're setting up a new insurance policy or you want to review an existing one, yes, you heard me, a completely free service. And arguably, life insurance is one of the most important purchases that you will make. It's complicated, so you want to make sure that you get it right. So it's worth using the help of an expert and getting in touch with us today. What's better is that where we arrange any insurance policies, we also provide a free will writing service at mylastwill.co.uk. So what are you waiting for? Make sure that you get in touch if you do need to arrange cover. And you can head over to our to book a free of charge appointment, which is dm.mortgage, or give us a call, drop us an email, and we will be happy to help you get something sorted. But first of all, I just want to start by looking at what life insurance actually is. And then we'll look at some of the more common mistakes. So let's start by just looking at a really brief summary on what life insurance is. So life insurance is going to provide a lump sum of money or monthly income to your beneficiaries. Your beneficiaries usually being family members, people that are financially dependent on you. And that lump sum or income is designed to help them to continue the lifestyle that they are accustomed to in the event that you have passed away. And it can help to pay off things like debts, whatever you choose to do with that payout, or your family would choose to do with that payout, then that's entirely up to them. But ultimately, it provides financial support to your family or beneficiaries in the event that you die. So the first mistake that people commonly make is choosing a low start or a reviewable option. So what is a low start or reviewable option, let's start by looking at low start to begin with. Now, a low start option means that the cover starts low in price, and then usually creeps up. And those increases are linked to it could be age or it could be just set by the insurer. But ultimately, the premiums will creep up and get more expensive. Okay, now low start is not necessarily always a mistake. If you know it's a low start option, and there's a reason you've chosen a low start option. So a good reason could be perhaps you are in a junior position at work, and you know that your salary will increase in future years, or something in your circumstances is going to change, that's going to mean that you can deal with those cost increases, then a low start option can be advantageous for many people. But quite often, I meet people that set policies up without knowing that it's a low start option. And that's problematic, because in future years, when it gets more expensive, and it potentially gets unaffordable, you might end up cancelling the cover at a time when you need it most. Now, the next common mistake that people make is choosing the wrong type of cover. Now life cover can take on many different forms, it can come as mortgage protection, family protection, term assurance, whole of life, there are so many different options. But ultimately, the product should be matched with the problem. What I mean by that is, if for example, on your death, there will be a shortfall to repaying the mortgage, then mortgage protection is designed to repay your mortgage in the event of your death. So ideally, the term of the cover and the amount of the cover would usually match the mortgage, you would not take out, generally speaking, a whole of life policy to cover a mortgage because a whole of life has an indefinite end date, it pays out when you die. So the two are not really matched for the same purpose, if you see what I mean. Now, the term of a policy should always be considered. So again, if you're looking at family protection, so family protection is still life cover, it's just that it's designed to cover your family as opposed to a mortgage debt. But ultimately, again, things that need to be considered are things like the age that your children might become financially independent, your retirement age, these are all factors that would go into choosing the most appropriate term. And the reason why choosing the right type of cover is so important is because you don't want to over-insure yourself or under-insure yourself, and everybody's circumstances are different. So matching the product to the problem depends on your individual circumstances. And that's why it should always get advice from an expert. So please do get in touch and we can have these conversations with you to make sure that you are choosing the right type of cover. The next common mistake is when people go directly through a bank to arrange their insurance policy or directly to one insurance company. And the reason that this can be a mistake is because the companies vary in many different ways. So let me just give you a few examples. They vary in terms of their payout rates, the quality of cover that they offer, in terms of some life insurance policies will give you added healthcare benefits for free, some might give you the option to add your children, some might provide added benefits such as cancer cover or give you a second medical opinion if you got sick. The costs can vary or the cover can vary massively. So again, when you're only going to one option, then you may be missing out on some really good options that are available. Now, not only that, but the costs can vary considerably as well. So if you go to a bank to set up your life insurance policy, banks quite often do something called load their premiums. So what I mean by that is that they get a price from the insurer and then they will add on potentially an extra 10 or 15%, 20% onto that premium because a bank usually has many overheads. They've got lots of different costs. So generally speaking, you wouldn't get the most competitive rate when you go through a bank. And obviously that's not ideal. Now, another reason why going direct is not ideal is because every company treats medical history and lifestyle very differently. So for example, some companies, if you are using electronic cigarettes, some might consider you a smoker, some might not if it's not a nicotine-based electronic cigarette, even things like medical history. So if you've got a family member that's had bowel cancer in the past, every company would price the policy differently according to that. If you have a high body mass index, every company would have a different outcome in terms of pricing potentially. So the reason why it's so important to look at lots of different options is because you would have a different outcome in many different circumstances. And as a company, we specialise in comparing lots of different companies, hundreds of different options. And we also have the ability to speak to the medical professionals at these insurance companies to research your situation before you make an application. So that just means that we know before you even submit anything, which company is likely to give you the best terms, which cuts out a lot of time and hassle. So that's certainly something that we can help with. Now, the next common mistake that I see people make is that they procrastinate and postpone taking the policy out. Now, let's be honest, when you take out life insurance, you hope that you never have to use it. But if you do, or if your family do, it's arguably one of the most valuable purchases that you will ever make. Now, quite often I hear people say, well, my circumstances are going to change in three, four, five years. So I'm just going to postpone taking it out and look at it in the future. Or in some cases, they make an application, but the terms of the policy because of medical history are not perhaps quite as favourable as they might have hoped. So they will say, oh, well, you know, when I change that particular thing, so for example, a smoker, yes, they're going to get charged more for their insurance. And people might say, when I stop smoking, I'll look at it then. Now, the issue with that is that as you get older, the cost of life insurance is going to increase. Not to mention, if your health changes, then the same options that are available to you today may not be available if and when your health changes. You may not even be able to get cover for certain medical conditions. And if you can, then the cost might come at a higher cost. So there are no advantages to postponing taking out life cover. If your circumstances are due to change, or as I mentioned, if you're a smoker, so you're going to pay a little bit more in the short term, but you're thinking of giving up in future years, then the point of life insurance is that you should review it at the time when your circumstances change. Certainly where we set up a policy, there are no cost implications to reviewing and changing the policy in future years. So there is absolutely no benefit to postponing taking it out. The way that I look at it is that having some cover in the short term is always better than none. And like I said, you can add to it or change it in future years. The next common mistake I want to talk about is that people quite often use comparison websites and just pick the cheapest option, blindly trusting the comparison website. Now, when you do this, I understand that when you set up life insurance, having a competitively priced policy is important, but it should not be the only determining factor that goes into why you've chosen that policy. What other research went into it? Now, if you pick the cheapest option, then you may want to ask further questions or think about some of the following things. What payout rates does the company have? Is it a low start option? As I mentioned earlier on in the video, are there exclusions? So some policies might only cover you if it's an accidental death. You need to be looking into these things. And as well, what added health care benefits come with the policy? So quite often for an extra few pence, maybe pounds, you can add things like health care benefits, children's cover, online GP services, so many fantastic options for a very small price difference. But as well, if you're not aware of these things, then you wouldn't know to do it. Now, is the insurance company as well aware of all of the material facts that they're basing the pricing on? So going back to my earlier point, an insurance company is going to price the policy according to your health, lifestyle, amongst other factors, family history, etc. So just because you've seen on a comparison website that the price is X, when the insurance company digs deeper, that price can change. And like I mentioned to you earlier on, us being experts, we would research all of this before you make any applications so that you don't get any nasty surprises. And it's really, really important. So the point I'm making is that so much research should go into making sure that that policy is right for you, and making sure that it's got the best value for money. And quite often, when you just go straight away to the cheapest option, you'll find that that's not the case. Now, the next common mistake that I see people make is that they compare the type of cover that they have or the cost of the cover with that of their family and or friends. Now, this can be a mistake because the price that you pay for your cover is individual. It's going to be based on your age, your health, whether you smoke, the amount of cover that you have, the term of the cover, the type of the cover, amongst other things. Pricing is so individual that it's impossible to compare what you have with somebody else. Also, as well, everyone's circumstances are different. So for example, if you've got two people, one earns £100,000 a year, one earns £20,000 a year, the loss if one of the two of them were to pass away would be very different. So they would be looking at different levels of cover. It's a different scenario. Let's say that you have a mortgage debt of £500,000, and your friend has a mortgage debt of £200,000. You're going to need different options and levels of cover. So it's very difficult to make comparisons between people's insurance options. Now also what you pay is down to your attitude to risk ultimately, and only you can be comfortable with that. Your friends and family ultimately are not going to be the people dealing with a situation if your spouse passes away. It's not them that's going to be left with the mortgage debt, it's you. So you ultimately have to be comfortable with the peace of mind that you have and the cost of the cover that you're paying because it's you potentially and your family that are going to be dealing with the impact of something happening. So you need to decide the peace of mind and how much you pay for that peace of mind. The next mistake that we'll look at is when people do not consider putting their life insurance policies into trust. Now I'll start by very briefly explaining what that even means. If you are putting your policy into trust, a very short brief summary, it means that the proceeds under that life insurance policy will pay directly to your beneficiaries. So that could be family, children or spouse for example, instead of to your legal estate. Therefore there are many benefits that come with that. The policy wouldn't be taken into account for inheritance tax calculation purposes, so there's potential huge tax savings. Inheritance tax is charged at 40% so you could be talking thousands of pounds saved there. But it also means that your beneficiaries receive the money much quicker. So usually where a policy is under trust, it pays out within days rather than again having to wait months for what's called probate to be resolved. And it's usually much quicker irrespective of whether you have a will in place or not. Even with a will, sorting out one's estate usually takes many months. So it's just making sure that your family get the money as quickly as possible. Now what one of the other benefits is that it also means that you decide who receives the payout, which is particularly important if you don't have a will. So for example if you're an unmarried couple and you set up a life insurance policy, if you're not married then there is nothing set in the law to say that your partner would inherit the proceeds from that policy. So you might find if you die without your policy being in either trust or you haven't got a will that the proceeds of that policy end up in somebody else's hands that you might not have wanted to. So it's so important to make sure that the policy proceeds pay out to who you want them to pay to. Now there are other benefits to having a policy under trust that I won't go into because I'm conscious that we've only got a short space of time in this video and trusts are very complicated as well but ultimately that requires specialist knowledge. There are many benefits to a policy being in trust and we provide free advice and arrange policies in trust completely free. So really do make sure that you get in touch if you're about to set up cover or you've already got a policy that's not in trust and we can help you sort that out. Now the next mistake that I see people about to make or have made it setting up a previous policy is that they've not shared all of their medical history. Now I've got two words for this one just don't it's just not worth it. Life insurance companies if you are not honest open and accurate with the information you give them they can reduce the amount that they pay out in the event of a claim or in some worst case scenarios they may reject a claim completely. Now when you do make a claim they will request your medical records and if what you told them an application contradicts what is in your medical records then that's when you have the potential for a problem to arise. Also when you're making an application do not assume and expect that they will ask your doctor about the information you've given them at the point of application. Quite often depending on what you disclose when you apply they are just taking your word for it so these problems may not surface like I say until you actually make a claim. So it's just not worth it you know you're paying this money for a policy you want it to be there when you need it or when your family need it so it's just really important to be honest open and accurate with all of the information that you are asked. So those are all of the most common mistakes that I see people making or have made when they're setting up their life insurance policy and I hope that video has really helped you to avoid making the same mistakes. Now ultimately with your life insurance it should be there when you need it most and these mistakes that potentially people make usually resurface at the time when them or their family needs to make a claim and that's why you want to avoid them at all costs. So to help you we as the experts are here to help we have so many years of experience of dealing with life insurance policies we have the knowledge to compare the options with you and give you expert advice to suit your individual circumstances so make sure that you head over to our website give us a call or drop us an email so that we can help you to arrange your policy or review an existing one completely free to arrange cover with us and with every policy that we arrange we can put them into trust and provide a free will writing service through mylastwill.co.uk so look forward to hearing from you I hope that video has been useful subscribe if it was and I'll see you in my next video