Life insurance is about protecting you and your family financially so if someone passes away unexpectedly, money concerns will be the last thing anyone has to worry about. Which is the way it should be at such a difficult time but, like anything important, mistakes can be made.
The perfect way to go – super old, wonderfully wrinkly and surrounded by family and friends. Perhaps even sharing a joke although death is near, knowing you are financially secure and your passing won’t cause money headaches for loved ones.
Some people are that lucky, but we can’t count on such a happy ending. That’s why people take on life insurance for that ‘just in case’ situation. But mistakes can easily be made, which can make getting the life insurance in the first place a bit of a pointless gesture. There’s a lot more to consider than just the cost every month, if you want it to really help your loved ones if someone passes away.
Steering you in the right direction is what independent insurance advisers do. They work in your best interests, not the insurance companies, to make sure you don’t waste years of insurance payments and end up with the payout you or your family need.
Advisers’ new clients often make the same mistakes, and time and again advisers set them right. They are also often able to cleverly manage insurance in such a way that avoids any doubling up of cover so payments are smaller.
So what mistakes do people often make? Recently, over 50 independent insurance advisers gave insuranceadvice.nz the answer to that question.
Here are the top ten, in no particular order:
Mistake # 1. Not enough cover
Paying off the mortgage, tick. Funeral costs, tick. That’s often the focus, but before you pat yourself on the back, know that it’s probably not enough. What about other financial commitments? If not taken into account when deciding on life insurance, you or your spouse could be in a real pickle if one of you passes away – especially if you have children.
These little people can create lots of other costs that are hidden until a tragedy takes place. For example, often one partner works while the other looks after the kids (or works part-time rather than full-time). If you died, would your spouse be able to afford to stay at home and look after the kids? Or, if you normally work full-time, would you be able to give up work to spend more time at home? Or if you stayed working full-time, would you have enough money to spend on childcare?
Giving up work or time looking after the family may be extremely unappealing. So ensuring there’s enough insurance cover to avoid making any big sacrifices is important.
Mistake # 2. Not insuring both spouses
Following on from the previous point, many people living together with children don’t understand the need to insure both partners. They mistakenly think that only the partner working needs to be insured, but this ignores the effect of the death on the non-working partner. The non-working partner may have to go to work to cover everyday costs, which creates further costs in childcare.
Mistake # 3. Too much cover
This is another common error. When it comes to insurance, the goal should be to purchase enough cover so that lifestyle for your loved ones is not compromised if you pass away – but they should not in a better position financially than when you were alive.
If you have a limited insurance budget, you may find that by reducing your life cover, the money saved could be used to fund (or partially fund) some other disability or health cover.
Mistake # 4. Buying on price
This was one of the most common mistakes noted by Kiwi advisers. It is often assumed that life insurance is a commodity with price as the main driver. However, life insurance is like any other product and quality plays an important role.
When going with an insurer, it’s important to know that they are strong and reliable. They need to be able to actually pay out if you claim.
Other aspects that should be looked at include terminal illness benefits and exclusions (e.g. some policies won’t pay out on suicides). See ‘Ignoring Riders’ below for more examples that show that life cover is definitely not a commodity.
It pays to take a bit of time to understand the options and variables before making a decision. Know that you are buying quality insurance.
Mistake # 5. Ignoring Riders
All types of insurance have what are known as ‘riders’. These are additional provisions related to the cover that kick in if a particular condition is met. For example, some life covers include a terminal illness clause. The clause may provide for a full or partial payout of the policy if the person insured is diagnosed as having a terminal illness and is likely to die within a specified period (e.g. 12 months).
Another example of a rider is buyback cover. This could be where you have taken out an accelerated disability cover linked to your life policy, or perhaps there are automatic increase entitlements for particular life events (eg. having a child).
Mistake # 6. Estate planning
People often make the mistake of not keeping their estate plans up to date. This is a huge error because your estate could end up in the wrong hands completely. There have been many horror stories about this.
When it comes to life insurance, keeping your estate plans current goes hand in hand with policy ownership and ensuring that your will is recent. It’s important so that life insurance proceeds end up where you want them – that’s key to the success of any insurance policy.
Did you know, for example, that a will made prior to marriage is no longer valid after you get married unless it specifically states that it was drawn up in anticipation of that marriage?
Make sure you take the opportunity to review your estate planning provisions EVERY TIME you make a change in your life insurance.
Mistake # 7. Nondeclaration
Failure to declare a health condition at the time of application can mean that the insurer has the right to void the policy. This means that even though you may end up paying for cover for years, the end result is that the insurer can refuse to pay out. For you, that’s a big waste of money over the years, and no claim money when you really need it.
The insurance company may even refuse to pay out if the health condition had nothing to do with your death.
If you are unsure about whether or not to mention something in your application, the best approach is to declare it and let the insurer determine whether it is important or not.
Mistake # 8. Accidental death only
Have you read the terms of your life cover? If you have ‘free’ or particularly cheap cover in place, it is quite possible that it pays out as a result of death by accident only.
Statistics suggest that less than ?% of deaths occur through accident. In effect, if you die, the likelihood of a payout from your accidental death cover, is ?%.
Mistake # 9. Inappropriate Ownership
Do you know who would receive the proceeds of your life insurance if you were to pass away? Do you know when they would receive it?
If the policy is in your name, the proceeds would go to your estate to be distributed in accordance with the terms of your will or, if you die without a will, according to the provisions of the (act required here). This typically means a delay before your loved ones receive the proceeds of your life cover.
If you are in a second or third marriage you may find that children from an earlier marriage may be able to claim some entitlement. Also, if you have a family trust it may be appropriate for the policy to be assigned to the trust if the beneficiaries of the trust are also the beneficiaries under the terms of your will.
Making sure the policy is owned appropriately is key to ensuring that your life insurance payout gets into the right hands when it is needed.
Mistake # 10. Life changes but not your cover
Many advisers notice that life insurance is treated as a ‘set and forget’ purchase, i.e. once it’s in place there’s no need to look at it again. However, as you get older and your circumstances change, your insurance needs also change.
Important life events such as starting a family, having another child, moving house, marriage, divorce or when the kids leave home, are all important times to re-assess your life insurance provisions. Your policy needs to be relevant in the context of your changed situation.
At the very least you should review your cover every couple of years and assess against your current estate planning provisions. Don’t let your policy payments end up a waste of time – irrelevant or with the wrong people benefiting.
It’s tempting to think of life insurance as another product or service with a price on it, but buying on price only and not getting advice could really get you or your loved ones into a pickle later on.
There are many factors to consider when setting up an effective life insurance policy that will pay out what you need, when you need it. If it doesn’t do that, there’s really no point in having it.
If you’d like free professional help from an independent life insurance adviser, check out our database (coming soon) for someone in your area. After all, if you’re going to get life insurance to protect your loved ones, you may as well do it properly and get someone to help point you in the right direction.
Conclusion
There are many factors to consider when setting up an effective life insurance policy that will pay out what you need, when you need it. If it doesn’t do that, there’s really no point in having it.
IMPORTANT PLEASE READ: This article is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you wish to consult a Financial Adviser, please use our “find an adviser” database.
