Trusts are failing the mass market as a way of securing death benefit payments, especially as the number of cohabitees increases, Swiss Re is warning.
The reinsurer’s latest research suggests around one million new policyholders a year may face issues with probate or even see benefits not being paid on the death of their loved one through not having the correct arrangements in place.
Swiss Re acknowledged some progress had been made in the last three years to increase the use of trusts, but emphasised that with the Consumer Duty looming there needed to be greater action, improved communication and most importantly, an alternative solution.
Vast majority not placed in trust
The Life cover payouts – under the microscope report, written in partnership with Insuring Change, was based on data from 2021 which showed an estimated 84% of single own life policies ̤were not placed in trust.
This was in a market where single life policies increased to 78.5% of level and decreasing term policy sales, up from 76.6% in 2020, and where 27.6% of all couples living together and under 65 were cohabitees, up from 22.9% in 2011 and 18.5% in 2001 ̤
As a result, the report warns more than a million new policyholders each year might be putting their beneficiary’s payments at risk.
And notably, the analysis shows the proportion of life policies being sold to cohabitees for their partner without ensuring the partner can claim has increased further.
“This combination of factors has placed an even greater number of potential claimants at risk of delays or, for the cohabiting sub-set of these, no access to the death benefits,” the report said.
“The market-wide exposure to this was over a million new cases a year over the last three years.
“In 2021, this included an increase of an additional estimated 56,000 single life policies not in trust, bringing the possible total to approximately 1,086,000.”
Level term the biggest problem
The report noted that level term life cover only was where the bulk of the problem lay, being the greatest contributor year-on-year of more policies set up without securing beneficiary rights to the proceeds.
Around only 13% of these single life policies were estimated to be placed in trust, by far the lowest proportion, but it produced by far the highest volumes of single life policies sold.
Some of this could be put down to non-advised sales, with this market increasing again to become more than half (50.3%) of level term life sales.
However, the report noted some intermediaries using a non-advice model make their free trust service a feature of their offering.
And it added the advised marketplace could be improved as the analysis suggested that at least 75% of single life policies sold with advice were still not being put in trust.
‘Not up to the job’
The report noted that while there would always be uses for trusts, particularly for wealthy people or those with complicated lives, they were not serving the mass market well.
“For the vast majority it’s clear from the continued low take-up that they are not up to the job when it comes to the usually simple requirement of stating who should get the death benefit,” it said.
“Additionally, the fact that they can be unnecessarily complicated and burdensome for all concerned means that, even supposing communication and process improvement could significantly raise volumes, the increased resulting overheads borne by both insurers and intermediaries would also be material.”
It also highlighted that the incoming Consumer Duty should be a catalyst to ensuring benefits access considerations were at the forefront of consumer offerings and the current process was not suitable.
“We should now be asking ourselves what we would expect from a policy for ourselves or a family member – would you intend to take out a life insurance policy and make it harder, or even just slower, for your loved ones to access the money after your death?” it said.
“The likely answer is no. So, we should look at how we can support customers to understand their options and help them make good financial decisions.”
As a result, it concluded that an alternative approach was most likely needed.
“As a minimum, insurers and intermediaries should look to improve communications with consumers to enable them to make effective decisions, especially when it comes to setting up their life insurance.
“However, to achieve consistent consumer outcomes of prompt access to death benefits fully for all intended claimants, the processes applied across the whole market will need to be very different from those of today,” it added.