I bet you’ve had your current life insurance policy a long time. Chances are, when you first bought it, you got a pretty good deal. But since you’re a busy person, I’d bet you simply threw it in the bottom drawer and forgot about it. Big mistake! If you’ve never taken the time to review your coverage, you’ve probably never noticed the scheduled price increase you’re paying as you get older.
And that’s why one of the most important money saving tips I can give you is this: Make it a habit to review your policy every 12 months. This way, you’ll know if you’re getting a good deal, whether you have enough coverage and whether or not it’s time to switch your policy. If it is, make sure you do these five vital things before moving a single cent.
To do list #1: Compare apples with apples
When it comes to picking life insurance, one of the best things that ever happened to you was the rise of industry competition. Thanks to the advent of “risk-only” cover, you no longer need to place your money in unnecessary, outdated policies that you’re unlikely to ever use. Instead, you can pick how much cover you want. You can choose whether to have a separate policy for your spouse or a joint one. And gone are the days when you were forced to buy equal amounts of life cover and disability and dread disease cover.
But all this choice comes at a cost: It means comparing policies to find the best one out there has become increasingly more difficult.
To make their products appear more attractive, life insurers rely on complex, confusing add-ons to differentiate their products. While those extras may make a policy seem cheaper, many of them (especially cash back plans) are no more than sales gimmicks. To avoid falling for them, “always consider what will happen to your premiums once you’re older and unhealthy,” advises personal finance guru, Bruce Cameron. After all, the purpose of your insurance is to enable you and your dependants to maintain your current standard of living should something happen to you.
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To do list #2: Make sure you know what you’re getting
There are two main types of life insurance – and both are very different. Make sure you know what you’re getting into before you sign:
• Universal Life Policies are flexible policies that come with a savings portion and a variety of additional benefits. It allows you to increase and decrease your cover, your premiums, your benefits and your savings portion as your circumstances change.
• Whole Life insurance, on the other hand, doesn’t generally come with a savings portion, although some products will allow you to hook on additional extras. This means the premium remains level, although there are insurers that allow you to increase your premium on the policy’s birthday or up your cover every few years.
And don’t forget to check the definitions of the medical conditions covered and get a detailed explanation of what is (and isn’t covered) by an insurance agent. This will tell you whether you’re getting the same level of cover for a lower price or not.
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To do list #3: Check the terms
Yes, price is a big factor when considering switching policies, but it’s not the only one you need to consider. For one, you must find out how long it will take before you’re paid a benefit and whether or not you’ll be given a temporary benefit while you wait. And remember, because you’ve bought a new policy later in life, you may pay more over the lifetime of a policy.
To do list #4: Don’t cancel unless you’ve got new cover
Many insurance agents suggest you change life insurance companies every few years to save on premiums. But before you do, ensure you’ve investigated the risks cautions Resolution Life. When you join with a new company, you become subject to a new underwriting assessment period – generally two years. If you die during this period, the company can (and probably will) investigate the statements you made on your application. If you’ve given inaccurate or incomplete answers, the company could refuse to pay the death benefit.
And that’s not all: Never cancel a life assurance policy before a new policy is in place, warns Cameron. “Your health may deteriorate in the interim, making you uninsurable or face expensive premium loadings and/or benefit exclusions for particular health conditions.”
To do list #5: Investigate the opportunity costs
If you’ve taken out a universal life policy, where you have a portion of your premiums in savings, you need to consider the opportunity costs should you switch policies. Opportunity costs are the costs (sacrifices) you face when you choose one option over an alternative. When you give the instruction to switch, your savings will be removed from the investment and placed in an interest-earning account. Since it could take up to six months for your funds to be transferred, you could lose out on any gains you would have made.
