Yahoo Finance Life insurance: what you must know before taking out a policy
One of the most prudent and altruistic financial decisions you can make is to take out life insurance.
But it can also be one of the most complicated because of the number of life insurance products on the market and all the associated add-ons.
Should you go whole of life or for a term? Should you get a policy that offers the same payout through the whole term or one that declines in value as you near the end of the insurance period?
Is critical illness cover worth it? Would my dependents be better off with just a lump sum or shall I give them a guaranteed annual income too?
These are not easy questions to answer, but you'll need to think seriously about them before you take out any life insurance policy.
With that in mind, here are three things you should know before looking into your life insurance options.
If you have no dependents you don’t need life insurance
Many people don’t realise this when they’re fretting over life insurance, but it’s very simple. If nobody is dependent on you financially, such as a spouse or children, then you do not need life insurance.
The purpose of life insurance is to protect those who rely on your income if you were to die early. No dependents, no protection needed. Save yourself the cost of a premium each month and spend it on enjoying life instead.
Be honest with the insurance company
When arranging your policy the insurer will ask for all sorts of detailed information about you, such as your health record and any history of drug taking, for example.
It is essential that you are completely honest about everything even if it means paying a slightly higher premium.
Why? Because any incorrect information could invalidate your insurance policy, leaving your loved ones without the financial protection they need.
Putting your policy ‘in trust’ might save a lot of money
Writing your life insurance policy in trust means any beneficiaries of it should you die won't have to pay inheritance tax on it.
Your dependents would receive all of the life insurance payout because they will be paid directly from the trust rather than via your estate.
There are lots of things to consider when deciding to write your policy in trust, and you should seek professional advice, but a big advantage is to avoid a payout being taxed as part of your estate.
Moreover, it sidesteps the bureaucratic, lengthy probate process. All your trust's named beneficiaries need to be paid is your death certificate.
