5 mistakes that kill life insurance claims

1. Lying on your life insurance application

They say the truth hurts, but it can hurt even more if you lie on your life insurance application. While it may be tempting to deny that you're a smoker, or that you've been treated for a particular disease or medical condition, you could find your policy null and void. Life insurance companies consider these factors when setting rates -- or determining whether to insure you at all.


If your life insurer finds out you lied, it's considered "material misrepresentation," and your application for life insurance will probably be denied. If the policy has already been issued, there's typically a two-year contestability period.

2. Failing to pay and letting your policy lapse

Just because you miss a payment doesn't mean your policy is dead in the water. Life insurance companies typically offer policyholders a 30-day grace period for payment, and some companies extend that to 60 days. During that time your policy will still be in effect.

Even after the grace period is up, you usually can get your term policy reinstated, but if the lapse has been lengthy you may need to undergo another medical examination. If you have a permanent life insurance policy, the insurer might use the cash value in the policy to cover the premiums and prevent a lapse in coverage. 

3. Failing to tell loved ones about your life insurance policy

If you never tell your beneficiaries about your life insurance policy, it doesn't mean the insurer won't pay them after your death, but it does make it a more difficult process. While most life insurance companies conduct database checks for the death of policyholders so beneficiaries will get paid, not all of insurers do so in a timely manner. That's why it's wise to be sure your loved ones know about your policy and where to find it after you're gone.

In some cases beneficiaries are unaware they are named on a policy, and proceeds go uncollected for years because some insurers are not diligent about tracking down survivors of policyholders. Several large companies, including Prudential, AIG,

4. Not naming a secondary and final beneficiary

It is important to name secondary and final beneficiaries. If your primary beneficiary dies before you, policy proceeds will go to the second beneficiary you have listed. If the secondary beneficiary has passed away when you die, then the death benefit goes to the final beneficiary. If you don't have anyone waiting in the wings, it doesn't mean the money disappears. In that case the proceeds will go to your estate.

5. In some cases, death due to risky behavior and suicide

Life insurance policies typically have a two-year exclusionary period for suicide, so your beneficiary typically would receive whatever you paid in premiums, but not the policy's face amount. So-called "suicide clauses" vary by insurer and are designed to discourage people from buying life insurance when contemplating suicide. If you're involved in criminal activity, and you're killed while committing a crime, your beneficiary will still receive the proceeds from your policy. 

Term life insurance vs permanent life insurance: Is cash value the best value?

How do term and cash value life insurance work?

Term life insurance generally offers the most amount of coverage for the least amount of money, and is the appropriate choice for most people. The most common reason to buy life insurance is to replace a person's income in case of early death, and term life insurance is the cheapest and best way to do that. Term life insurance is also an especially good choice for people and families who are just starting out, because it's relatively cheap and provides a lot of protection when replacing income is most important.

Cash value life insurance, also called permanent or whole life insurance, offers protection for your entire life (as long as you pay your premiums) and more flexibility than term life insurance. However, it usually comes at a much higher price. For example, the premium for a cash value policy can easily be 10 or more times higher than a term policy with the same level of coverage. The feature that makes permanent life insurance different is its ability to gain cash value. A portion of the money you pay into your premium goes into a cash value portion that grows over time, and becomes available for your use after a certain period.

How does cash value work?

The cash value component of a policy can work differently and be used for different things depending on the type of permanent life insurance you choose. There are four main variations: whole (or ordinary) life, universal (or adjustable) life, variable life, and variable universal life.

Whole life insurance is a predictable policy that provides a guaranteed benefit, a guaranteed earnings rate on your cash value, and a level premium. You may also earn dividends based on how well the company performs. Whole life is the most basic kind of permanent life insurance.

Universal life insurance is a flexible option that lets you vary your premium payments. After the first premium, you can usually make payments at any time. If you have extra money, you can pay more. If you can't afford to make a payment, you can skip it or pay less. The cash value portion usually operates in a similar manner as with whole life insurance. A problem with universal life is that if you don't make enough payments, or the company does not perform as expected, your policy could lapse. Newer types of universal life policies include guarantees that this will not happen, so be sure that you explore this option. Universal life can be one of the cheapest forms of permanent life insurance.

Variable life insurance allows you to invest your policy premiums. The problem with this is that if the investments perform poorly, the death benefit and cash value will decrease. On the other hand, if the investments perform well, the death benefit and cash value can greatly exceed those of a normal policy. Variable life is one of the most risky forms of permanent insurance, although its rewards can be great as well.

Variable universal life insurance, as its name implies, is a combination of variable and universal life insurance. It allows you to vary your payments, invest your policy premiums, and vary your coverage amount. Variable universal life insurance is the most flexible type of permanent life insurance, and can be either risky or predictable, depending on how you use it

Life insurance and ‘trusts’

What is a ‘trust’
If you have taken out life insurance to provide for your family after your death, the money could be subject to inheritance tax (IHT) as it will form part of your estate when you die. For this reason, it’s probably a good idea to place the policy ‘in trust’. With your policy written ‘in trust’ your loved ones can then legally sidestep IHT and will not have to give any of the proceeds of the policy to the taxman. Putting a policy in trust can also help your beneficiaries avoid probate. This means they can get hold of the life insurance payout without a lengthy legal process.

How do trusts work?
A trust is simply a legal arrangement that allows you – known as the settlor – to bequeath your life insurance to someone else, known as the beneficiary. The settlor also appoints trustees who take legal ownership of the trust and look after the deeds which govern it. They are duty bound to act in the interest of the beneficiaries at all times. There is usually a minimum of three trustees who must all be aged 18 or over. If you want to change a trustee, all the other must agree. It is the responsibility of the settlor to pay the premiums for the life policy, even when it is in trust. The settlor is also usually a trustee, so has some control of the management of the trust.

Trust benefits
A trust also allows you to decide who will get the money from your life insurance – and even how it is spent. For example, you might insist that any proceeds are used to fund your children’s education.  The third advantage of a trust is that it usually means the money is paid quickly to the beneficiaries, because they do not have to wait for a grant of probate. However, it’s important to remember that you are handing over control of the trust, all or in part, to the trustees. Also, once a policy is put into trust it is almost impossible to cancel the arrangement

How do I set up a trust?
Most life insurance policies can be placed in trust, and it’s a fairly straightforward process. Your insurance company will normally supply the relevant forms free of charge. They should be offered to you when you apply for your policy, or you should be given a clear indication that the trust option is available. Don’t hesitate to ask for the forms if necessary.

When can I put an existing policy into trust?
You can put your policy in trust at any time, so it doesn’t matter if you took out the life insurance yesterday, last year or several years ago.

Types of trust 

There are various different types of trust – and the best one depends on your personal circumstances. A discretionary trust, for example, is a flexible arrangement that allows you to add beneficiaries and give guidance to trustees in a letter of wishes. An absolute trust is more rigid because the beneficiaries cannot be changed. The different types of trust can be treated differently for IHT purposes. The trust might also pay tax itself. It is therefore important to seek expert legal advice if you are thinking of placing your life policy in trust.

How our site is paid for

How do we make money on life insurance at MoneySuperMarket?
Life insurance companies want to be on our site, and they pay us a commission every time somebody buys their life insurance through MoneySuperMarket. We also work with LifeSearch, an independent life insurance adviser, to help our customers find the right insurance for them. When someone buys life insurance from LifeSearch via MoneySuperMarket, LifeSearch pay us a fee.

Do we offer the ‘whole of market’ on life insurance?
We would like to offer our customers the whole of the market, but some life insurance brands choose not to appear on MoneySuperMarket. We include as many life insurance options as we can.

How do our relationships with life companies affect our service to you?
We never allow life insurance companies to get in the way of what’s best for our customers. So the way we show life insurance options are based on their benefits to you – such as how much it might cost when you make a full application – never what’s best for a life insurance company.

Why are we telling you this?
Our services are always free to you, our customers. But we think it’s important that we’re transparent about how we earn money, so you can be confident we put our customers first.

What is mortgage life insurance ?

The aim of a life insurance policy is to help your dependants cope financially if you die,
so outstanding debts and living expenses are less of a burden on them.

A common type of policy used for this is term life insurance. This is designed to pay out if the policyholder dies during the term of the policy. When you apply for this type of life insurance you’ll select how long you want the policy term to be, for example 25 years.

How does it work?
A decreasing term policy is usually used to cover the outstanding balance of a repayment mortgage.
With a repayment mortgage your debt decreases with each repayment you make. As your outstanding debt goes down, you may find that the amount of life cover you need will also decrease.

How is it different from level term insurance?
There is another common type of term life cover called level term life insurance. This policy is quite straightforward – it’s designed to pay out a flat sum if you die within the policy term. The payout is the same regardless of when it happens, and so premiums tend to be higher. To find out more, read ourguide to level term insurance.

Points to consider with mortgage life cover :
There are a few things to bear in mind when taking out this kind of policy. First of all, it may not be appropriate if you have an interest-only home loan, as the amount you owe the lender will not be falling year-on-year. Many people decide to extend their mortgage term when they move house, or when they want to reduce the size of their monthly repayments.

It's important to ensure that the length of the policy term always matches the term of the mortgage, so if your mortgage term changes for any reason, talk to your insurer about changing your life insurance policy.
Your mortgage lender may attempt to sell you life cover when you get your mortgage. You’re under no obligation to buy from them, so take the time to compare life insurance quotes and find a policy that best suits you.

Would your death in service workcover be sufficient ?

Some employers give their staff some extra financial security by providing a 'death in service' benefit.
That doesn't mean you have to die while actually doing your job to qualify, just that if you die while working for that employer then they will pay an agreed amount. That amount varies but is usually a multiple of your salary, for example, a lump sum payment of four years of your pay.

You might find that that's enough cover. If you've nearly cleared your mortgage and your kids are about to leave home, then you may decide that this payout would be sufficient to protect your loved ones.

However, if it wouldn't cover all your family's costs then it's a good idea to consider a life insurance policy, too

Remember!
If you leave or lose your job you're likely to lose any insurance benefits offered by your employer

Don't worry, that wouldn't cancel your death in service benefit - they would both still pay out if you died as it is possible to hold multiple life insurance policies. Before cancelling a life insurance policy in order to rely on a death in service benefit, be aware that you would lose that benefit if you lost your job. At that point, you might find it hard to qualify for life cover again, or at least be facing higher premiums. Think carefully before ending a policy early

The 3 tips below are geared towards first-time life insurance buyers.

1. Find the right type of policy. Many first-time buyers think that all life insurance policies are the same. Nothing could be further from the truth. The two main types of policies are whole and term. You will also come across less common options, including universal and variable life insurance. To be sure of your decision, consider them all.
Whole life insurance covers you until the day you die. When you pass on, your beneficiary will receive your death benefit. With term life insurance, you are only covered for a specified period of time. If you outlive a term life insurance policy, it expires and nobody receives your death benefit. At this point, you will either purchase another term policy or do without.

2. How much coverage do you need ? Along with the type of policy, you need to consider how much coverage you need. Some experts suggest that your death benefit be at least six to eight times your annual salary. So, if you earn $100k per year, you should have a life insurance policy worth at least $600k. While this sounds multiple of annual salary sounds good in theory, it can be difficult to stick with this formula. Do you really need this much coverage? Do you need more than this? Does it fit in with your budget?
Nobody really knows for sure how much life insurance coverage they need. While you can use a standard multiplier as a starting point, you should discuss this with your family and financial advisor to determine the proper amount. This aspect can vary a lot based on the person’s unique situation.

3. Which company are you going to buy from ? This is a detail that is constantly overlooked. Some consumers think that all life insurance companies are created equal. This is not the case now, and never will be in the future. Simply put, a life insurance policy is only as good as the company that you buy from. There are several agencies that rate insurance companies based on quality of investments, financial standing, and other related details. The four major rating services include: A.M. Best, Fitch, Moody’s, and Standard and Poor’s. Among other things, you want to make sure you are not paying too much for your insurance.

As a recent first time buyer of life insurance, these are the three areas where I focused most of my time and attention. While there are other more complex issues to consider as you get deeper into the process, these are the three key areas that you need to be very cognizant of when making your decision.

Step Learn why and when you need life insurance.

Simply put, life insurance gives your family or business greater peace of mind after you die. It’s money they can use to help pay the mortgage, run the household, maintain the lifestyle you’ve worked so hard to provide or help transition your business. It can also help ensure that your family or business partner won’t be burdened with debt. Without enough life insurance, assets like your home or business might have to be sold to pay outstanding bills.

If you checked one or more boxes above, you may need more life insurance.Any one of these life events can trigger the need for additional life insurance. Even if you already have some insurance, there’s a good chance you might not have enough or the right kind. And that means the people who matter most to you could suffer financially if something unexpectedly happens to you.

The importance of life insurance
While it is easy to procrastinate when it comes to buying insurance, we never know what the future holds for us. So it’s important that we have sufficient insurance in place at all times in case the unthinkable happens.

How life insurance works
When you buy a life insurance policy, regardless of the type of policy, the foundation of every life insurance policy works this way.

1. The insurance company agrees to pay your beneficiaries a specified amount of money when the insured person dies, as defined by the policy.

2. You pay for the policy by making premium payments. The premiums you pay depend on your age, gender, health and lifestyle, the kind of insurance you buy, and any extra features and riders you add to the policy.

3. Your beneficiaries generally won’t have to pay income tax on the money they receive from your insurance policy according to current IRS regulations (see IRC Section 101(a)).