Life Insurance Tips and Tricks
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I wrote this Life Insurance Tips and Tricks section as it is great that we all know some life insurance hacks. It may just save you lots of money, time, and confusion. Some life insurance terms are very specific or we rarely hear them, so it makes sense to do your own insurance research, and be prepared when you tend to take out an insurance policy. I would recommend you to also visit my Life Insurance FAQs page, where I answered most asked questions I stumped upon in my career as an insurance expert, and my Genius James Blog, where I write about ways how to save money with Life Insurance, and also about other insurance topics, I think everyone should be aware of.
Life insurance is not an investment, but it can be a strategic risk management financial tool. Suze Orman, a well-known American financial advisor, recommends that people take out at least 20 times their annual income in life insurance to fully protect their loved ones and make sure that they never have financial hardship. The benefit of taking out life insurance is to protect your loved ones against being financially destitute in the event of your death. Although the insured person does not receive the benefit, it gives them peace of mind knowing that their family would be cared for financially if anything happened to them.
The general answer we can give you is as soon as possible. We recommend doing it before you turn 30 and no later than 35! Bear in mind that the younger you are when you take out your life insurance policy, the lower your premiums will be. You will also likely have fewer health problems at a younger age, so it may be much easier to get good coverage. Luckily, life itself gives us reminders and helps us with this decision. Are you getting married? Well, you love your partner and would do anything for them, right? What about providing for them in case anything happens to you? Approximately 170,000 people in England spent last Christmas alone, as they are widowed.
Are you planning to start a family? That is also a good checkpoint in our lives when we suddenly start thinking about the future and how we will provide for our young ones.Are you approaching retirement and would not like to leave the cost of burial service as a burden to your children? Did you know that the average cost of dying in the UK is £9,263?
Do not conceal facts from your life insurance provider!
You might be a smoker or know you have a pre-existing medical condition, and knowing that this will substantially raise your monthly premium, you decide to keep it to yourself or, worse, lie about it to your insurer. You may get away with it initially, and your insurance provider may not send you to a medical exam. They might even offer you good terms. Great, right? You beat the system. Wrong!
After you die, if the insurance company realizes that you consciously withheld information from them, your family will not get the promised payout. Even if you were paying your premiums for the entire term of your policy, they might end up with nothing. So set the temptation aside, be honest and, if necessary, pay that extra amount every month - in the end, it is worth it!
That is just too obvious, right? Wrong! One out of every 600 people is a beneficiary of an unclaimed life insurance policy. Imagine you are paying for the policy your whole life, and in the end, the insurance company has nobody to pay the lump sum to. What steps do you need to take to make sure your coverage will go to whoever you want?
Decide who you will leave the money to.
You can decide between one or more beneficiaries. If you decide you want to spread the payment among more people, you can even decide how much each individual will get, or you can leave the decision to a trust or trustee. If you have nobody, you can decide and leave the money to a charity or some non-profit organization.
When naming your beneficiaries, be specific. Don’t just say you want to leave the money to your children. Be precise. If you have more than one child, and one of them dies before you, you would surely like the surviving children to get the whole payout, right? That brings us to the next piece of advice…
One of the most common mistakes we encounter is not keeping the list of your beneficiaries up-to-date. Forget about the example we made in the previous paragraph for just a moment and imagine that you are in your 20s and you decide to get life insurance. You are not married and do not have kids. You decide that you will name your father as a beneficiary. How nice of you! But then, later in life, you meet a partner, get married, and have kids. Do you still want your father to receive your inheritance? What happens if you forget to change the beneficiary and your father passes away? Keep your life insurance policy up-to-date!
Your beneficiary or entity can’t be located, has refused to claim your cover, or has died before you. Who would you like the money to go to? In that case, a contingent or secondary beneficiary becomes the recipient - if you have specified one.
When you try to take out a mortgage, some lenders may require you to have a life insurance policy as some sort of security. They will also try to sell you one, but be aware that it’s probably the worst offer you can get. Just refuse and then do your own research and find a policy that offers you the best possible terms. This usually happens when you put a downpayment of less than 20% of the estate’s purchase price.
Having life insurance is not a legal requirement to take out a mortgage, but we would strongly recommend it as, if anything happens to you, your family may struggle with payments and could face repossession of your home.
A will is a document indicating your intent of how your assets should be divided in case of your death. A life insurance policy is a formally binding contract with a higher priority than your will. As you can see, this may cause some conflicts if both documents aren’t harmonized, especially if you get married, divorced, or remarry. That is why it is important to have an up-to-date policy and will, and if both are written by the same person or company, you minimize the chances of any possible dispute regarding your legacy.
You may find yourself in a position where you need cash fast. A situation where the money you need now surpasses the need to have life insurance. Compared to other types of insurance policies, life insurance policies have no real value for their policyholders while they are still alive, excluding the peace of mind they can provide.
We wouldn't recommend it, but if you are in a position where you need money, selling a life insurance policy, which is also known as a life settlement, can be profitable. It won’t be easy, though. In most cases, people who buy policies tend to buy them from policyholders over 65 years old, who are not the healthiest, or they buy high-value policies with low, flexible premiums, so they pay as few premiums as possible.
You could go down that path by yourself, but we recommend you find yourself a broker or a life insurance settlement company. If you decide to find someone who specializes in that field, note that they will most likely charge you a commission.
While selling your life insurance policy should be the last resort, there are some examples when selling a policy makes sense. One of them is finding yourself in a position where you can no longer afford to pay premiums. You may get more out of it by selling than taking the surrender value. However, make sure to also read about the alternatives to selling your policy.
Before you decide to sell your life insurance policy, think about all the possible alternatives to it. As we’ve mentioned already, selling your policy should be the last resort, as it is not the most profitable way and also isn’t easy. So, what are the alternatives to selling your life insurance policy?
Replace the existing policy
Your policy may be outdated. Since insurance products and their pricing change non-stop, it can be a good idea to evaluate your options of replacing the policy with one that has better conditions and terms.
Pay your premiums with the accumulated cash value
If you struggle with payments but want to keep your policy, you may be able to get access to the accumulated cash value to cover your monthly premiums. How this will affect your policy depends on your insurer, so be sure to talk with them about the options available to you.
Borrow from the policy
When you don’t want to cancel your life insurance policy but still need cash for something other than paying your premiums, you may be able to borrow money from the accumulated cash value of your policy. However, in most cases, the loan will accrue interest, so be sure to check whether this really is the best option for you. And also, if you don’t pay back what you borrowed, your death benefit may be reduced or will lapse.
ADB - Accelerated death benefits
Most life insurance policies have this option embedded in their terms, but not all do. Sometimes, you will need to add a rider to a policy for this benefit. This will allow you to take out a portion of your life insurance money as an advance if you have been diagnosed with a serious or terminal illness, so you can pay for your treatment costs. However, keep in mind that you will still need to pay your premiums while receiving benefits and that this may reduce your end-of-policy payout by a significant amount.
Yes, backdating your policy is possible and legal. You may wonder why this is a great option. One of the criteria that can influence your coverage and premiums is your age. Age may just be a number, but this number can save you a lot of money. There is a big difference between, for example, being 28 years old or 29 years old. It may not seem like much, but your premium may be higher - and don’t forget you will be paying this amount for many years or even decades to come. So to save you money, insurance companies offer the option of backdating your policy for up to 6 months. By doing so, you can lower your premium indefinitely, but know that you will need to pay the premiums for the time you backdated your policy upfront. Nevertheless, this may save you a significant amount of money over the years!
If you think having one joint life insurance policy is better than having two life insurance policies, think again. In most cases, buying two separate life insurance policies will amount to a similar price as buying one joint life insurance policy - and in some cases, two might even be cheaper. The most obvious difference between these options is the payout. If you have two separate life insurance policies, you can expect two payouts if the insured person dies during the insured period. With one joint policy, you can only get one payout. Having a standalone life insurance policy also gives you more control and flexibility over what you want to do with your cover.
The most obvious example of why two policies are better than one joint (first-to-die) policy is if your policy serves you as a cover for an outstanding mortgage. In the event of death, the surviving spouse will suddenly be left without insurance once a payout is made. If that payout is not high enough to cover the whole mortgage, the surviving spouse may be forced to get a new life insurance policy, but know that this one will be much more expensive as they will be older. Another complication may occur in the case of divorce! You can read more about joint life insurance policies here.
Writing life insurance in trust is one of the best ways to protect your family’s future in the event of your death.Why put life insurance in trust? While life insurance payouts aren’t subject to income or capital gains tax, they may still be subject to inheritance tax. To avoid inheritance tax, put your life insurance into trust! This can also speed up the payout process.A trust is a legal arrangement where the policy owner relinquishes ownership of the life insurance policy and lets the trust take the proprietorship of the policy. There are different types of trusts, such as absolute trust, survivor’s discretionary trust, flexible trust, and discretionary trust. We would recommend getting legal help to set your trust up, as there are several differences among them. For example, if you have Absolute Trust, you won’t be able to change beneficiaries!
This sounds like something so complicated that only brokers could understand it. Wrong! It’s really simple, and we would recommend doing it, especially if you have long-term coverage. We all know terms like inflation, right? We know it means that money loses value over time. So, you took out life insurance for a term of 30 years with a payout of £300,000. Today, these £300,000 may be enough for your kids to buy themselves a house and even pay off their debts. But in 30 years, there are no guarantees that this will be enough for a one-bedroom apartment. So, what can you do to ensure that your children get the value you intended they get? Index-link your life insurance. Thus, you will ensure that your payout value will be as high as promised. Note that this will cause your premiums to become higher every month, depending on inflation, which for the UK, on average, is 4,82% annually.
Professional Advice from Genius James:
The Cheaper Option is a Better One!
Life insurance is not like car insurance, for example. It is very straightforward. There is not a lot to dispute over when someone dies. Think about what it is you want to insure, what kind of cover is right for you and how much that will cost you in terms of premiums. It’s okay to go with the cheapest option, as there are almost no risks involved. As long as you don’t conceal information regarding your health from your insurer and pay your premiums on time, you should be okay, and your family provided for.