The Four Biggest Don’ts Of Life Insurance

Although your life cannot be replaced, the financial void you leave when your life ends, can. The most favourable and effective way to ensure that the void is adequately filled is through purchasing life insurance. The advantages of life insurance as a risk mechanism are multiple: you enjoy cover from day one; the cover is paid immediately upon your death; it is paid directly to your beneficiaries instead of to your estate and the amount paid across is tax free.

South African consumers are spoilt for choice in as far as selection is concerned, both from an intermediary and a product perspective. Information, calculators and so forth are readily available, making purchasing insurance a relatively simple and painless process.

But – and there inevitably is a ‘but’ where any form of risk instrument is concerned – there are a few pitfalls. These pitfalls are not created by the insurers, but rather by the approach that we, as consumers, adopt. To help you avoid the most common of those, we look at the Four Biggest Don’ts Of Life Insurance:

Don’t end up on a guilt trip…

…instead of on a life insurance shopping trip. If you do, you will end up buying more than you need.

Many of the brochures, advertisements and articles aimed at life insurance policy holders could manipulate your conscience, making you feel quite guilty if you do not intend leaving your beneficiaries as potential stars in the next series of The World’s Richest People. This need not be the aim of your life insurance policies. Instead of being flamboyant, rather adopt a realistic approach: replace your income, cater for estate duties and taxes, ensure that your beneficiaries’ future educational or medical needs can be met and create a financial buffer to cover unforeseen expenses.

Paying across too much of your household money right now will inevitably result in depriving your beneficiaries of something they cannot buy when you are dead – and that is the memories made while spending quality time together, having a holiday or doing something that all of you enjoy doing…while you are alive!

Don’t buy blind…

…not now, not ever. Being life insurance savvy is important. To ensure that you do not waste time and money, decide on the type and the amount of cover you require from the outset.

Your goals for wanting to purchase life insurance should always be the main driver when shopping for a life insurance policy. Research to identify which products match your needs and remain focussed on those product types for comparative shopping purposes. Don’t allow yourself to be sidetracked without good reason.

Carefully evaluate how much cover you really need; there are many online calculators that can help you make the sums. Avoid ancillary benefits that don’t contribute to your goal. For instance, purchasing a dread disease benefit when there is no history of dread disease in your family could be a very expensive and superfluous luxury. Remember that there are no refunds should you avoid contracting cancer or one of the other dread diseases before the benefit expires.

Don’t lie…

…it never pays. If you are not completely honest, and the insurer finds this out, you could end up without cover when you die. This completely defies the purpose of having bought life insurance in the first place.

The information you supply on your application form is used by the insurer to determine your risk profile. If you omit anything or if you modify something considered relevant by the insurer, they will be legally entitled to reject your life insurance claim.

Rather be completely honest. Even if – at worst – your honesty leads to a higher premium, at least you will have the peace of mind knowing that your beneficiaries will not be subjected to the stress and expense of life insurance disputes on top of having to emotionally cope with losing someone they love.

Don’t just sign…

…first read. The insurer’s responsibility is to be transparent about their life insurance offer. Your responsibility is to ensure that you understand every last detail before signing the agreement. Should any dispute arise in the future, and the insurance company can prove that you had the benefit of the information upfront, the ruling may well not end up in your favour.

When you find your ideal life insurance product, don’t make the mistake of assuming the details – this is where the devil hides. Instead, carefully scrutinise your life insurance policy and pay particular attention to the following matters:

  1. Clarify hard-to-understand clauses;
  2. be aware of what is excluded and why;
  3. know whether the policy will remain in force until your death or whether it will expire when you reach a certain age;
  4. find out whether you will have to notify your insurer of changes to your health profile and, if you need to, how they should be notified and what the implications will be;
  5. check whether you can borrow against the policy;
  6. establish whether there are any renewable or convertible clauses.

If there is anything you do not understand or know, ask. Also insist that the response from the insurer is submitted to you in writing. Don’t sign anything unless you are completely comfortable with the responses you received.