Leaving the intended beneficiary of a life insurance policy no right to claim is like selling a car without a steering wheel.
This is according Ruth Gilbert, partner at Insuring Change, (pictured left) who spoke exclusively to Health & Protection along with Ron Wheatcroft, technical manager at Swiss Re (pictured right) ahead of publication of their joint report Life Claims: a beneficial direction.
The report explored the risk of term life insurance policies resulting in delayed claims or, worse still, payment to someone other than the policyholder intended.
Key findings
Some of its key findings include:
- In 2022, the beneficiary gap (Swiss Re’s estimate of new single own life policies without specified direction of proceeds on death) for new single life term policies (with or without critical illness) was 79%, down from 84% in 2021.
- The estimated number of possible new single life policies not in trust fell to approximately 962,000, largely due to a drop of 96,287 in total term sales which included life cover.
- The overall proportion of single life policies increased to 78.8% (up from 78.6% in 2021), and reached 91.2% of all level term life cover, including with critical illness.
- Non-advised level term life-only (LTA) sales fell by 98,761 policies (or nearly a quarter) year-on-year in 2022. These now represent 42.2% of all LTA sales, down from 50.3% in 2021.
- The average time from application to grant of probate or administration in England and Wales has increased markedly over recent years.
The report also estimates that there are about eight million in-force policies not in trust – and that up to two million of these could be held by a cohabitee whose partner would not automatically receive the pay out if intestacy rules were applied.
It comes just months after the regulator introduced the Consumer Duty which now applies to new and existing products that are open to business. The duty will apply to closed book policies from the end of July 2024.
Like selling a car without a steering wheel
When asked about some of the main issues in setting up life insurance policies, Gilbert pointed to where the direction of proceeds are not built in as “core” to the customer journey.
“It’s a bit like selling a car without a steering wheel,” Gilbert told Health & Protection.
“You wouldn’t do it as an optional extra mentioned maybe as an afterthought in the small print that you might want to consider to make sure the thing goes in the right direction.
“Also, communication seems to be a bit of an afterthought in many settings. Some advisers are achieving a much higher rate of take up than others, so they must be communicating in a different way.”
Wheatcroft stressed the importance of seeing the proposition as not just buying a life insurance policy but buying a policy to benefit a dependant.
“For providers it’s important to ensure messaging goes out consistently across the market but also to reflect the type of business and needs that’s coming into them,” Wheatcroft explained.
“But at the heart of it all is you have a customer with dependants and it’s vital that we make sure that the proceeds get to the dependants as quickly as possible when a claim occurs.”
Danger is not knowing
Gilbert explained the big danger for the one in three couples who are not married or in a civil partnership is not knowing they need to take an additional step to pass proceeds on to their partner.
“If one dies, they don’t necessarily realise that they have no rights,” she added.
“So if they haven’t done a will, and many of the younger ones haven’t, then intestacy rules passes everything to next of kin and their partner is not next of kin according to the rules.
“The big risk is that many of those couples who might have taken cover out for each other don’t realise that actually it’s the dead person’s mum and dad or sibling or children who would be entitled to the money under intestacy rules – not their partner.
“So it’s 100% loss of proceeds – that’s the risk in a nutshell.”
Though Gilbert maintained there is also a secondary risk where it is difficult to access the proceeds even where couples are married.
“At least in that instance, you’re going to inherit once you’ve got probate or the administration of the estate but how long does that take?” she continued.
“It takes a lot longer than it used to. That’s the secondary risk, that it could take months on end for some people when they could have had the money in a couple of weeks.”
Not a good consumer outcome
In light of the Consumer Duty rollout this summer, Wheatcroft maintained a “good outcome” for the customer who expected to receive money from a life insurance policy but receives nothing was in no way a good outcome.
“It just can’t be,” he continued.
“We have heard of cases where people have lost six figures of money where they may have expected to get a benefit, and they’ve got nothing so it is a fundamental problem to be addressed.
“The other problems are around speed of payment of claim and we do see commentary in the media. It’s right that insurers are challenged on the basis that claims can get paid quite slowly in some cases.
“Sometimes it’s inevitable due to the nature of the risk that’s presented and managing the claim, so it can take time.
“Nonetheless there is an opportunity to use this as a positive that if the ownership is established at outset, whether that’s through a trust or through a beneficiary nomination, then you are putting in place a very strong process to enable the claim to be paid quicker. You are not being caught up with the chance that probate may take several months for example.
“I think it’s an opportunity for intermediaries to play their part in ensuring that claims can be paid quicker by setting up the policies in trust or under a beneficiary nomination. If I was a beneficiary, I would expect that to happen anyway irrespective of whether I was given advice or not.”
Breathing space
But it appears the sector may have some breathing space in order to get its house in order.
“I don’t think the Financial Conduct Authority (FCA) has cottoned on to it yet,” Gilbert said.
“So it does give a bit of breathing space for insurers to get on the front foot and start to offer beneficiary nomination.
“Once they’ve become aware of it, it will become obvious to the FCA and they will start adding it to the key performance indicators (KPIs) they expect to be receiving from insurers as to what extent they have got to grips with the problem.”
Gilbert noted those offering beneficiary nomination have already made it a lot simpler and allowed both consumers and advisers the greater likelihood they will get the policy set up correctly.
“Many advisers will say I always advise a trust and some do brilliantly and get much higher results but then others advise a trust and it still doesn’t happen,” she contiuned.
“It takes a lot of effort. It starts with communication about the reason why.
“It’s not about inheritance tax which often gets mentioned as the first thing which puts people off because most people don’t have that problem, but making clear that in order to get the money where it’s supposed to go, you need to either do beneficiary nomination or put in trust if that’s the option available.
“This is all assuming it’s not a joint life policy of course, but the majority of polices are single life, so making that a core part of getting to the root of ‘what is the purpose of this policy?’ you would think was a natural part of the conversation.”