Paying too much for insurance?

Kevin Carr has had a long career in the insurance industry, and even he admits he spent too much to protect his family.

When his financial adviser recently reviewed his expenses, he was told that his level of protection insurance – products like life insurance or income protection cover, which are designed to provide for your family financially – was a bit “top”.

“Looking at what was happening with our mortgage, Isa and other expenses, he told us we were spending too much money on protection (compared to other families in similar positions),” says Carr, 49, and chief executive of Protection Review, a website that reviews the protection insurance industry.

Last year, 247,000 people took out income protection insurance, a record high and a 16% increase on 2022, according to new figures from the Association of British Insurers. At the same time, sales of stand-alone critical illness cover were almost four times higher than 10 years ago.

Market failures in pure protection result in damage to existing customers

In August, the Financial Conduct Authority, which regulates insurers, announced it was launching a market study into how the protection products – which are mainly offered through intermediaries such as IFAs and mortgage brokers – are being sold. Products, especially those aimed at “vulnerable” customers, may not be structured correctly and may not offer value for money.

Concerns about the level of competition in the market have grown since the recent exit of major insurers such as Aegon, Canada Life and AIG. The watchdog says it will look into “potential conflicts of interest” between insurers and intermediaries, saying it has seen examples of intermediaries encouraging customers to switch unnecessarily to earn repeat commission.

It’s an investigation that is “long overdue”, says Tim Hogg, director at consumer group Fairer Finance. “Market failures in pure protection lead to damage for existing customers. . . The nature of competition in this market has meant that intermediaries sometimes receive what appear to be high commissions, resulting in products of lesser value to consumers.”

While a few “insurtechs” are entering the market to shake things up a bit, “there’s not a lot of incentive for insurers to be different,” Carr says. “First mover disadvantage is a problem – it either doesn’t work or competitors copy it. So there is a lack of innovation and strategy development.”

When the FT asked readers if they had ever taken out insurance policies they regretted, one told us that, having recently moved jobs at 62, he would no longer have death benefits in service or a decent level of sickness payments for the first time in 20 years. , so he had to buy his own. “Most online searches make you enter a phone number even if you prefer to correspond by email,” he says. “It feels like a hard sell from the sales people (and) makes me wary of the coverage and the companies involved.”

But while many worry that they might overpay or have too much coverage, the opposite is often true, too. Financial advisers warn of widespread underinsurance – especially among those with chronic conditions. With too many people buying the wrong type of protection, customers can be left with overlapping policies or large gaps that can lead to problems later in life.

“I see clients who have multiple life policies running together where they are overinsured at the moment, but they all seem to end at a different time,” says Naomi Greatorex, managing director at Heath Protection Solutions. “This can mean they are overinsured in their younger years and underinsured in their later, and arguably riskier, years.”

Alan Knowles, managing director at Cura Financial Services, says: “The order in which people usually buy protection insurance is: one, life insurance; two, critical illness; three, income protection. However, the likelihood of a complaint. . . it’s completely the opposite.”

The reason advisers put income protection at the top of their hierarchy of needs isn’t just to protect your family. “Your income is what allows you to continue to meet your retirement plan and grow your savings and pensions,” says Greatorex.

But how much protection do you really need? And is it ever reasonable to say “I don’t need it at all”?

Sometimes overprotection is obvious, Knowles says. “An example would be someone earning £20,000, living in a rented accommodation and paying £2m life cover for their partner. That would represent 100 years of their annual income, so it’s definitely over the top.”

A less obvious but more common risk is doubling up on income protection with an employer by also running an individual policy. This is because you are only allowed to cover your income once, usually up to a maximum of 60% of your gross income. If someone’s employment policy covered 30% of their income, for example, their personal policy might only cover up to another 30%.

“If you have more than one income protection insurance policy, or the one you have is based on a higher salary that you had in the past but no longer have, you could be overinsured.” says Chris Steele, founder and editor. by the educational website MyTribeInsurance.co.uk. Freelancers need to be especially careful, as income can decrease over several years, especially if you start working part-time.

31%Proportion of financial advisers who say their clients took out the wrong type of protection before seeking advice, according to MetLife UK

People can also get caught up in inflation, says Greatorex. If you take the maximum protection of 60 per cent and the cover increases in line with RPI, while your income does not keep up, at the claims stage you may find yourself overinsured.

Advisers say it’s worth checking your cover is good value regularly as premiums have come down over the years – but also watch out for changing underwriting practices.

“With life insurance and critical illness cover, insurers have recently changed what they ask for and how they treat people who used to smoke,” says Steele. Until recently, people were asked if they had smoked, vaped or used nicotine replacement in the past 12 months, he says. Now, they can be asked if they used to smoke or vape in the past as well, and their premium is loaded to account for that.

The FCA study will focus primarily on four types of protection products: term insurance (which is life insurance that only lasts for a certain period of time); critical illness cover; income protection; and whole life insurance, including over-50 policies that offer guaranteed acceptance.

Johnny Timpson is a member of the Financial Services Consumer Panel and Financial Inclusion Commissioner and sees problems with over-50s plans, also marketed as funeral plans. “You pay a lot more for the ‘reward’ of not having a medical exam. But if the policy has been underwritten, you may be able to get significantly more coverage at the same cost, or the same level of coverage at a lower cost.”

“Seven years ago, I was diagnosed with type 2 diabetes. It was a bit of a shock,” says FT reader David Ellison, 55, from Milton Keynes. After considering life insurance, he decided to buy a policy that would pay out £40,000 as a financial cushion to support his wife should he die in the next 15 years.

Last year he approached six major insurers and was asked for premiums of £80-£100 a month because of his condition. But he then managed to find a policy with the same level of cover for £43 a month at Blueberry Life, a new ‘insurtech’ company which specializes in insuring people with diabetes, and was able to tailor the cover to his specific level of blood sugar. levels.

“I think insurance is a necessary evil,” he says. “It could be 15 years of £43 a month that I never see again. But it’s peace of mind.”

Advisers say clients often fail to change protection as they go through life events that can affect the amount of income needed, such as a health diagnosis, divorce or their children becoming adults – be warned, though, adds Timpson: “It’s you probably now have more dependent children than you think. My oldest child is 38, but in a working career that means he may need help with the rent from time to time.”

Another development is when people pay off their mortgage, which can lead some to wonder: am I too rich for protection insurance?

“Once people have paid off their mortgages and have enough invested assets to enable them to fund their financial future without relying on income or having to save more, they often feel it is a waste of money to pay insurance premiums for life cover or sickness cover. ” says Olivia Bowen, partner at Castlefield.

In these circumstances, advisors like Bowen can perform cash flow projections to help clients feel satisfied that their assets will be sufficient.

Knowles, however, is wary of saying you can be too rich for insurance: “The more you earn, the more you normally spend, and so the impact is greater if something serious happens. . . at least for most other than the super-rich.”

Additionally, later in life there may still be life insurance needs, especially for those with large assets. A policy that pays out to children once both parents have died can help with Inheritance Tax (IHT). It is also possible to insure gifts made to children during life, where there may be a tax liability, normally for seven years after the gift is made. A policy could provide the children with the funds needed to pay the gift tax if death occurs within this time frame.

The solution may be a whole life policy on the value of the potential IHT liability, written in trust for the children (or other beneficiaries). Justin Blower of Schroders says: “It can be expensive – thousands of pounds a year, depending on your health and level of cover – but what you pay can be less than the benefit.”

Finally, when we asked FT readers to share their experiences with protection insurance, several told us they see it as something of a gamble. “Insurance companies are betting you survive. We’re betting we’re going to die or suffer life-changing circumstances,” said one.

But, it’s a gamble, others have suggested, that it’s hard to feel too bad about losing. “We had a joint 25-year life insurance policy that expired last year and here we are both still going,” one told us. “I suppose we should probably be grateful for that fact.”