Life insurance: tackling the myths

If you have dependants, having life insurance is crucial. We dispel some of the myths surrounding it.

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Life insurance provides precious peace of mind that your family and dependants will be looked after financially if you pass away prematurely.

But for many of us, life insurance remains an awkward topic – we’re talking about death, after all, and that’s never easy.

That goes some of the way to explaining why a number of myths have grown up around the way life insurance works.

Here, we expose the most common ones so that you can make a better choice about which policy will provide the best protection for you and your loved ones.

Myth 1 - You’ll need to have a medical or release your medical records

It’s unlikely you’ll be asked to undertake a medical when you apply for life insurance. An insurer will only request one if you’ve had severe health problems in the past and it wants to check how you are now.

Similarly, insurers will only need to access medical records in a minority of cases, usually if the applicant has past or current health issues, or there is a history of, say, heart disease in the family.

Myth 2 - You’ll need annual health check-ups to maintain your policy

The good news is, once you’ve got your policy, there’s no requirement for annual medical check-ups.

Myth 3 - You don’t need life cover if you’re not working

Even if you don’t work, if you have dependants, it’s still important to think about how your family could be affected financially if you were to pass away.

For example, if you stay at home looking after the children while your partner works, you’ll need cover to fund childcare costs if you’re no longer around. Taking out life insurance can be a vital financial lifeline.

Myth 4 – Couples should always take out joint life policies

A joint life policy won’t always be the best option – it will depend on the circumstances. A joint life policy will almost always be cheaper than two separate policies, but the cover won’t be as extensive or as flexible.

Joint policies will only pay out once, so the first claim you make would result in the end of the policy. That would mean the second person would no longer be covered and would need to take out a new policy if they wanted to continue having life insurance.

If they did then take out another policy, because they would be older, their premiums on the new policy would be higher.

Complications can also arise if the couple splits up.

But if separate policies are unaffordable, a joint policy is a valuable option.

Myth 5 - You’ll be credit checked by the insurer

No credit check is required for an insurer to provide you with cover. If at any point you can no longer afford premiums then you simply stop paying them and the policy and cover will cease.

Myth 6 - If you have combined life and critical illness cover, the policy can pay out twice

Most people buy critical illness cover – a policy that pays out if you are diagnosed with one of a list of serious ailments – alongside life insurance. The critical illness element is either in addition to or combined with your life insurance policy.

With an additional cover policy, you’ll receive a pay-out a) if you get a critical illness and b) if you pass away (both during the term of the policy). So that’s two potential pay-outs.

With combined cover, you’ll only receive one pay-out, either if you become critically ill or if you pass away (during the term of the policy).

At MoneySuperMarket, we believe the additional cover option provides a more flexible and comprehensive solution than a combined policy. When you run a life insurance quote with us, we give you the option to add critical illness cover, with an additional premium calculated using the information you gave when completing the life quote.

Myth 7 - If you have term insurance, you’ll get a cash lump sum if you survive

Unfortunately, you won’t get your premiums back if you don’t make a claim during the term of the policy. The policy simply comes to an end, and there is no payment to you.

Myth 8 – Life insurance payouts are always tax-free

They’re not, but they can be. The key is to have the policy ‘written in trust’. Your insurer or broker should sort that out for you – so make sure they do.

Proceeds from a policy written in trust are not taxed. If the policy is not written in trust the pay-out will be added to the deceased person’s estate, which means it could be subject to inheritance tax, levied at 40%.

Writing the policy in trust is not only tax efficient, it will also speed up the payment process.

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