The cover conundrum

Of course, this is a difficult sell, because not only would people prefer to spend their hard-earned cash on a nice family holiday in the sun rather than salting it away ‘just in case’ something goes wrong in the future, there is also a general mistrust of insurers’ motivation to pay out when the time comes.

The latest figures from the ABI show that in 2014, 128,500 customers were paid around £3.44bn through protection insurance, averaging out at £9.4m a day for more than 350 people or families – the highest level yet seen. Is it fair that the public assumes insurers duck their responsibilities when they have to pay out? Well, actually no, as the figures suggest the opposite.

The ABI trumpets that the whole of life insurance payouts reach 99.98 per cent – frankly, though, that is little surprise. After all, it is pretty incontrovertible – death is a certainty in life, and for the most part the reason why you have left this mortal coil is usually quite easily understood. The average payout seems pretty low, though, at just £7,400. Term assurance payouts reached 98.7 per cent in 2014, and the average payout was a much heftier £60,900.

However, the picture is more patchy when it comes to other types of protection insurance payouts. For example, the average payout for income protection policies stood at just under £10,000 last year, paying out for an average of 204 weeks – or just under four years – amounting to 92.9 per cent of claims.

But the real kicker – and the one that has probably led to at least some of the public’s mistrust when it comes to protection policy payouts – comes with the total permanent disability claims, which averaged £73,200 – but only reached 64.1 per cent of claims paid out in 2014. That is not even two-thirds of the claims that were made, although the payouts had risen from a mere 50 per cent of claims made in 2009.

Part of the reason for this lowly figure six years ago was the lack of a standard definition for TPD, which the ABI introduced in 2011 in the Critical Illness Statement of Best Practice. Apparently, this lack of clarity “led to claims being made that did not qualify”. Well, that might have been the case, but forgive my scepticism – I have a suspicion that at least some insurers were hiding behind this lack of clarity to avoid a big payout.

“Is it fair that the public assumes insurers duck their responsibilities when they have to pay out?”

Now, do not get me wrong. I am most certainly not saying that all denied claims are down to the insurers not playing fair – far from it. My partner used to be a fraud investigator, and in 12 years of investigating these kinds of claims against insurers, a handful would have turned out to be genuinely in need of that payout. The rest were swinging the lead. It must be remembered of course that by the time private investigators are called in to ascertain whether a claim is bogus or not, the insurer is fairly confident that it is, which would explain the high rate of fraud discovered.

But the ABI’s own info shows that the reason most claims are declined is because the claimant failed to disclose something relevant on the application form that the insurer then used to deny payment. Fair? Yes and no.

While it is understandable for insurers to insist all the relevant information is disclosed at the outset, there is also a potential lack of knowledge and understanding that the person taking out the policy will have. Is it fair to assume that a policyholder will know exactly why each and every question is being asked? No, I don’t think it is. Should they disclose anything that they feel is material to the application? Yes, otherwise it is obvious that the policy could be invalidated.

But if you are not asked a specific question about your health that elicits a specific response, how can you be expected to know if something is relevant to the policy that not mentioning it could lead to a payout being denied? Well, this is where the adviser comes in.

The Mas figures show a woefully small number of people have protection policies in place, despite nearly a third experiencing a “serious financial shock” in the last five years, such as losing a job or not being able to work because they were injured. Around one million workers a year find themselves in this position.

While unsurprisingly most people say they cannot afford the cover, the second most common reason for not buying for one in five people is because they had not considered it. This suggests that if advisers suggested this type of insurance more often, more people may take the cover.

Having specialist knowledge and a clear understanding of the reason behind the types of questions the insurers are asking means advisers are able to steer people in the right direction, and perhaps even prompting them to provide information which without their intervention would not be forthcoming. When it comes to making a claim, this could be priceless – it could make the difference between a payout for life, or no payout at all.

Alison Steed is a freelance journalist