It turns out they do pay … 98% of the time
Life insurance. Bo-ring. Possibly the least sexy type of insurance … and that’s saying something.
Remember the film The Truman Show? They wanted to make Jim Carrey’s job as normal and as unremarkable as possible so, naturally, they made him a life insurance salesman.
Most of us would rather not talk about life insurance because it’s an itty bitty boring, and because it touches on death and illness and disease and all the other things we’d rather not think about, thank you very much.
But life insurance has a vital role to play. In fact, life insurance is more than it seems …
It’s not just about death
Plenty of people think of life insurance as death insurance. You pay money every month to your insurer then, when you die, your insurer pays your family a big lump sum.
This is true … a few caveats aside. But there’s much more to it.
Life insurance isn’t one product but in fact a family of products and each product a slightly different job. People who work in the industry will tell you that life insurance protects lives but it also protects livelihoods and lifestyles. It’s not just about death …
The top two reasons folks in Britain give for swerving life insurance is the perception that it’s too expensive (it’s not) and that insurers don’t pay out (they do, more later).
Financial planners like us over here tend to recommend some of the lesser-known life insurance products because they make sure that you, alive you, can maintain financial health if ever your physical health lets you down.
Costs, products, risk
Life insurance costs are based on the customer’s risk. Risk in this context is actually a shorthand for risk of claiming.
Basically, your life insurance costs reflect how likely you are to die or get sick and thus claim on your big lump sum. Rule of thumb, low risk equals less cost, high risk equals high cost; hence life insurance products are typically much cheaper when you buy young.
There are several products under the life insurance umbrella but here we’ll touch on three key ones, starting with the head of the family:
Life insurance can be bought for a fixed term (say 10, 20 or 25 years) or until you die.
Assuming you keep up your monthly payments and die within your policy term, your insurer will pay the pre agreed sum of money to your loved ones. Oh and if you’re smart you can arrange it so your family don’t pay inheritance tax on it.
Critical illness cover works like life insurance but it pays out not upon your death but if you’re diagnosed with a life-changing illness.
Most insurers cover heart attacks, cancers, strokes and some disabilities as standard. The payout is often used to cover lost earnings, lifestyle disruption and the additional costs that usually coincide with major illness.
Family income benefit is a form of life insurance that’s usually a bit cheaper. It pays not a big lump sum but a regular steady wage to your family after you die.
It’s is a good way to go if you’re worried your people would struggle to handle a big dump of cash and / or you’d prefer they have a consistent and predictable income.
All of the above have clauses, caveats and small print galore, but that’s the gist.
Income protection
Financial planners often focus on income protection (hence why it gets its own section) because your income is probably the foundation of your entire financial life.
Income protection, essentially, is a private sick pay package you can design for yourself. It insures your income will keep coming – even if you’re physically unable to work.
Why would you do that? Because employer sick pay doesn’t last forever; maybe six or nine months if you’re lucky. When UK statutory sick pay kicks in (which it probably won’t if you’re self-employed) you’ll have to live on less than £110 per week.
Given you’re way more likely to be off work sick than you are to die before you’re 50, income protection is there to continue paying a significant portion of your wage (it’s up to you how much, but let’ say 60-70%) so you can keep your overheads and lifestyle going.
Financial planners might tell you that income protection is the foundation of financial health. It means you won’t have to gouge your savings or make a backwards life-move if ever you’re off work sick or injured.
Great but do insurers even pay out?
Now we come to the great life insurance swindle and it’s pretty simple: insurer scare stories (‘they don’t pay out’) command a lot of column inches but don’t reflect reality.
For years, industry governing bodies have charted claims data and it turns out life insurers pay out a whopping 98% of the time. This has been the case for several years.
In the 2% of cases where life insurers don’t pay, it’s usually because they say a customer lied or misled on application, and thus the policy was created / costed on a false premise.
To explain this the easiest example is smoking. Smokers (including vapers) typically pay much more for life insurance than non-smokers, such are the health risks of smoking.
If you smoke but tell an insurer you don’t, your policy will be cheaper … but the insurer likely won’t pay if you develop smoking-related problems as the policy was built on a lie.
Oh and in other recent life insurance news, 2022 saw UK claims payouts edge towards a total of £7bn – that’s an all-time-record.
Get it done so it’s done
In financial planning, and taking control of your money, a lot of the gig is thinking in terms of Plan Bs and What Ifs – and that’s where life insurance products come in.
If you’re on the fence then here’s a thought exercise: what’d happen if you died, or couldn’t work? How would your household / family cope minus your income?
Give it some thought and if you need more then the Money Means Book has you covered.
For now we can strike life insurance off our list … and maybe you’ll think about striking it off yours.