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To fully benefit from life insurance you must set up and manage your policy in the right way, avoiding common mistakes that people often make. In this guide, we highlight 11 life insurance pitfalls and offer tips on how to navigate them for life insurance success.
Taking out a life insurance policy could be one of the most important financial decisions that you ever make. The repercussions of making a mistake could be significant, affecting both the financial security and the wellbeing of your loved ones.
Choosing the wrong policy, underestimating the necessary cover, or failing to disclose critical information could mean that your family does not receive the financial support they need when it matters most. High premiums, denied claims, or unexpected tax liabilities could also be consequences if you don't give your life insurance the attention it deserves.
Generally speaking, the younger you are when you first purchase life insurance, the lower your premiums will be.
This is because life insurance companies set their prices by calculating the risk of having to make a payout, as well as the size of that payout. Their criteria include:
But perhaps the criteria insurance companies place the most emphasis on is your age. Younger people tend to live healthier lives and are less likely to have experienced medical issues.
The younger you are, the longer your life expectancy and the cheaper your life insurance premium payments. For instance, according to data from Moneyfacts the average monthly premium for a 40-year-old non-smoker with a £100,000 level term life insurance policy over a 25 year term is almost double the price of the same policy for an equivalent 25-year-old.
Also, your ability to get life insurance can be heavily influenced by your medical history. If you wait too long and are diagnosed with a medical condition you may find yourself unable to obtain cover at all.
So, the best time to get a life insurance policy is today. Don't make the mistake of leaving it too late and find that your premiums are unaffordable or you can’t get the cover you need.
There are significant differences between the life insurance policies that insurers offer. From premiums to cover options, from introductory rewards to additional life insurance products, every available policy is slightly different.
When you buy life insurance, it’s wise to spend time assessing the market. By comparing plans you can ensure that you purchase the right policy for your needs, at the best price. Don't automatically go with the first policy you come across, the one from the insurance provider you use for your car or home insurance, or the one with the most persuasive advertising.
Here are three tips to find success when buying life insurance:
All life insurance policies are designed to pay out a lump sum to your loved ones if you pass away while you have the cover in place, but there are many different types of policy, each designed for specific needs and financial situations. Choosing the wrong one could mean paying higher premiums than necessary or not having adequate cover when it matters most.
There are two main categories of life insurance:
Even within these broad categories, different types of policies will better serve some needs than others and will vary in price.
For instance, level term insurance, where the cover amount and premiums are fixed throughout the policy term, is well-suited for those who want predictable premiums and cover for fixed obligations, such as replacing an income or supporting dependants.
Decreasing term life insurance, where the cover amount decreases through the policy term, but the premiums stay the same, is suitable for covering debts that reduce over time like a repayment mortgage or loan. However, it would not be appropriate for an interest-only mortgage or to cover other expenses that do not decrease over time.
An increasing term life insurance means the cover amount and premiums increase over time to safeguard the purchasing power of your payout from inflation. This can be useful for protecting long-term financial commitments that may grow over time such as future education costs.
Meanwhile, whole of life insurance provides permanent life insurance cover as you are guaranteed a payout regardless of when you pass away. This makes it suitable for estate planning, funeral costs or leaving an inheritance, but individuals will need to be comfortable with paying the higher premiums that come with it.
Over 50s life insurance, a type of whole life insurance for older people, is typically used for lower payouts and appeals to those who want guaranteed acceptance without a medical exam. It can be a more practical option for those looking to cover funeral expenses or leave a small legacy.
You should take the time to assess your needs and compare policies carefully before making a decision.
When deciding on a policy, consider:
You can read more about how life insurance works in our guide.
In 2023, the average life insurance payout in the UK was £80,403 - Source
Too many people make the mistake of not getting adequate life cover. When they pass away, their loved ones find that their payout doesn’t fully replace their lost income or meet their financial obligations.
Although a higher cover amount costs more in premiums, you should always go for a cover amount that suits your needs.
Think about the level of financial protection your loved ones would need if you passed away unexpectedly, including:
Consider how you can provide that financial legacy without jeopardising your current financial situation.
If you opt for a term life insurance policy, you also have to think about how long you will be insured for. Make sure your policy doesn't run out at a time when your family might need it most, such as when your child is attending university or your partner is approaching retirement.
When buying life insurance, your insurance company will likely ask you a lot of questions about your personal circumstances. You may even have to undergo a medical exam.
Knowing that the cost of your life insurance policy is determined by factors such as your medical history and whether or not you smoke, it may be tempting to conceal certain facts about yourself. For example, you could choose not to mention that you had a heart attack the previous year.
Withholding information on your application is a serious mistake, known as non-disclosure. If you pass away and your loved ones make a claim, the insurance company will assess whether their claim is valid. They will ask about the cause of your death and may even access your medical records and post-mortem results.
If the insurer discovers that you've lied or withheld crucial information, it may refuse to pay out the claim. Honesty is always the best policy.
Price comparison websites can be useful for getting a reading of the life insurance market. However, you shouldn't simply buy the cheapest policy without understanding what you're getting into.
Often, the cheapest policy is the cheapest for a reason. There is more to buying life insurance than just the price you pay.
It's important to find an insurance provider that delivers a good service, is trustworthy, and is likely to pay your loved ones' claim if you pass away. (Life insurance companies publish their payout percentages each year, so make that part of your research.)
When comparing life insurance policies, you may also find that providers offer incentives to tempt you in, such as vouchers, gym memberships or other gifts. While these offers may seem attractive, never let them be the reason you buy a life insurance policy that doesn't suit your needs or meet your financial goals.
With standard life insurance policies, your payout (death benefit) is considered part of your estate when you pass away.
This can have significant tax implications. Because your payout is part of your estate, it counts towards your inheritance tax threshold. This means that your loved ones may find that they have to pay up to 40% of it back in estate taxes.
The remedy is to get your policy 'written in trust' when you first purchase it. When you set up a trust for your life policy, it is not considered part of your estate and is not liable for inheritance tax.
As well as the tax benefits, putting your policy in trust gives you more control over who can benefit from your life cover when you pass away. It could also mean that your beneficiaries can access the payout quicker after making a claim.
Setting up a trust sounds complicated, but it really isn't. Your insurance broker or financial adviser will explain how it works and help you set it up. Don't make the mistake of not putting your life insurance in trust.
Not all life insurance policies are the same. Every life insurance company offers different things to its customers to help them make the most of their policy. In many cases, these extras can be beneficial.
Extras offered by insurance providers may include:
Richard Eagling, Senior Editor at myTribe, says:
"While these extras can be attractive and add extra value to a life insurance policy beyond just the potential monetary payout, you should be aware that they are usually not contractual benefits. This means that providers can remove or amend them at any time during the life of your policy."
It's also worth considering optional extras that you can add to your policy for an additional cost, including:
Waiver of premium - Allows you to stop paying your life policy premiums without losing your cover if you're unable to work due to illness or injury. Rather than cancelling the policy, the insurer will waive the premiums for a set period while you focus on your recovery.
Critical illness cover - Pays out part of your cover amount if you're diagnosed with a serious illness, which you can use to replace lost income or support your recovery.
Income protection - Pays a monthly income tax-free if you're unable to work because of sickness or injury.
While financial protection for your loved ones should be your priority for life insurance, don't forget to consider these extra features and options.
Life insurance is pretty straightforward. If you pass away during the period that you're insured, your loved ones will receive a payout.
However, a common mistake is thinking that life insurance can perform other functions, such as replacing your income if you are unable to work due to injury or illness, or providing a payout if you are diagnosed with a serious illness. These are what income protection and critical illness cover are designed for. While such cover can be added to your policy, it is not automatically included.
It's also essential to remember that life insurance is not an investment vehicle. There's no cash value component to your life insurance policy. If you decide you don't want to be covered anymore, you can't get your money back.
Always read the small print of your life insurance terms and conditions. It will spell out exactly what your policy does, and doesn't, do.
If you don't pay your life insurance premiums you'll lose your insurance cover. It's that simple.
Don't fall into the trap of missing payments by accident, such as if you change your bank account details and forget to inform your insurer. If this does happen most insurers offer a grace period, sometimes as much as 60 days, during which time you can make your missed payment without your cover being cancelled.
If you feel that you're in a bad financial situation and cannot pay your premiums anymore, don't just stop. Talk to your insurer. They may have some options that can help you meet your obligations without losing your cover.
Don't make the mistake of thinking that once you've bought your life policy, it's job done.
When things change in your life - such as getting married or divorced, having children or grandchildren, retiring, or even giving up smoking - your life insurance needs could change, too.
You should regularly review your life insurance to make sure it still meets your needs. You may feel you could benefit from making changes, such as:
In this situation, your insurance company will be happy to help.
It's also worth noting that there are no rules against taking out multiple life insurance policies. You could use another policy to perform a different function, like covering a new mortgage or helping a new family member become financially independent.
As you can see, there are a lot of life insurance pitfalls to navigate. So how can you ensure you get the right policy at the best price, your purchase goes smoothly, and your policy continues to serve you long in the future?
The best approach is to speak with an experienced insurance broker or financial adviser as early as you can in the process.
A broker will be able to explain all your life cover options and help you choose the right policy. They'll find the best price for you, handle the paperwork and make sure all the i's are dotted and the t's crossed. Plus, they'll keep in touch with you regularly to see that you're still getting value from your policy.
With a professional in your corner, the life insurance pitfalls disappear.
Request a free comparison quote, and we’ll connect you with the an experienced broker best suited to help.
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Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.
Mike is a personal finance copywriter who has written for numerous financial services publications and websites over many years.
