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.
