Taking out life insurance is a simple and inexpensive way to protect an individual’s family and underpin many other forms of financial planning.
But in spite of efforts to simplify the underwriting process and promote the product’s near-perfect claims record, take-up remains significantly lower than it should be.
Recent research, the LifeSearch Health, Wealth & Happiness Report 2018, shows 57 per cent of consumers have no life insurance, with a further 11 per cent unsure whether they have or not.
Of those with cover, the average sum insured is £105,303 – less than half the UK’s average house price of £232,554, according to Land Registry data.
The research also found evidence of a mismatch between consumers’ circumstances and the level of cover they had in place. LifeSearch chief executive Tom Baigrie explains: “We asked people about their fears and anxieties but, although taking out life insurance would be good for their peace of mind, we found that people did not connect these concerns with taking out protection.”
These fears included the sudden death of someone close to them, which was cited by 31 per cent of women and 20 per cent of men, and suffering from poor health, with 33 per cent of women and 29 per cent of men worried about this.
Cover misconceptions
Given the low take-up of life insurance in spite of these fears, it is important to identify the barriers preventing consumers from engaging with protection.
To do this, Drewberry Insurance also undertook research, in the shape of its 2018 Protection Insurance Survey.
Rob Harvey, head of protection advice at Drewberry, explains: “We found consumers overestimate the cost of life insurance but also underestimate both the risk of a claim and the likelihood of it being paid. It is a perfect storm.”
In terms of mortality risk, it found consumers estimated that, on average, one in 45 people aged 35 would die within the next 30 years. This is much lower than reality, with data from the Office for National Statistics showing the figure is closer to one in eight.
As well as downplaying the risk of death, consumers also significantly overestimate the cost of life insurance.
When asked how much a healthy 35-year-old non-smoker would pay a month to take out £250,000 of life insurance to age 65, the average estimate came in at £42.74. The actual cost is around a third of this, at just £14.35. Table 1 shows some example costs of cover.
Further fuelling decisions to not take out cover is the belief that insurers avoid paying the majority of their claims. Respondents believe just 37.7 per cent of claims are paid, significantly lower than the 98 per cent that are settled, according to Association of British Insurers’ statistics.
Dispelling the myths
For Richard Kateley, head of intermediary development at Legal & General, the key to dispelling these myths is to make protection part of the client conversation.
“Every financial adviser has a duty of care to help clients address their protection needs, but many shy away from this conversation as it is regarded as a negative,” he explains.
“It should be the cornerstone of all financial advice, from mortgages through to investments and pensions.”
As an example, he points to one adviser who makes protection part of his clients’ pension drawdown advice. He adds: “Even though they are in retirement and taking an income from their pensions, he recommends income protection for their children. This helps to protect the Bank of Mum and Dad if the kids are unable to work due to illness or injury.”
Where advising on protection does not fit with an adviser’s business model, Mr Baigrie recommends outsourcing to a professional. This can either be on a commercial basis, with referral fees paid when cover is taken out, or simply to ensure they are receiving holistic advice.
Insurers can also do more to boost take-up. As well as supporting an awareness campaign such as Seven Families, which helped to show how protection supports families, insurance companies could make it easier for advisers to arrange life cover.
The underwriting process is already benefitting from this overhaul, with insurers removing the need for such great quantities of medical evidence. For example, AIG has shortened the application process on its Instant Life product, removing the need for this evidence. As a result, it takes around eight minutes to complete, with customers notified of the outcome instantly.
Further work could deliver additional benefits, as Mark Cracknell, head of protection distribution at Aviva, explains: “Insurers must remove complexities and create product propositions that suit different adviser models. It has got to be as easy as possible to introduce life insurance to a client meeting.”
Out of sight
Convincing consumers to take out cover may be a challenge, but more work is also required to engage existing life insurance clients. Even though they are likely to be paying a monthly premium, LifeSearch’s research found that 11 per cent of respondents were not sure whether they had cover or not.
Some might steer away from reminding them, for fear it could risk the policy being cancelled altogether, but there are also advisers and insurers in favour of contacting the client regularly.
Mr Baigrie explains: “I recommend calling clients once a year to check the policy is worthwhile. They might need to change their level of cover if their circumstances have changed and some may even be eligible to make a claim. One in nine of the claims we deal with are initiated by a call from our policy review team.”
Increasing cover to suit a client’s changing circumstances is a relatively straightforward process. Guaranteed insurability options enable a policyholder to increase the sum insured without further medical underwriting in the event of a trigger event, such as marriage, birth or adoption of a child, or a larger mortgage.
There are also indications that insurers will ramp up this flexibility. Guardian Financial Services, a newer challenger in the protection market, offers a facility – reserved cover – that allows policyholders to increase cover or add a different type through a shortened underwriting process, without the need to resort to a key life event. This is available during the first 27 months of a policy.
Mr Harvey welcomes this innovation. He says: “It recognises that life event-based increases can be restrictive. Insurers need to appeal to younger people who might not be considering marriage, children or a house purchase.”
Adding value
The other advantage of these regular nudges is that they can help clients get more value from their policy. Many protection products now include a range of added-value benefits, most of which can be used without the policyholder needing to make a claim. These include second medical opinion services such as Best Doctors, medical information, and counselling and bereavement support.
As an example, Legal & General customers can take advantage of its GP24 service – in addition to a range of health support services – for an additional fee of £3.25 a month. This gives the policyholder and their family access to an unlimited number of virtual GP consultations plus a prescription fulfilment service.
With life insurance offering a low-cost and simple way to protect a client’s family, it should be part of any financial planning conversation. Given it also supports their financial goals, raising awareness is a must.
