Almost a fifth of people (18%) with life insurance do not understand the terms by which their beneficiaries would get a pay-out from their policy in the event of their death according to the Post Office. The study also revealed that around two fifths (38%) of us are unable to correctly explain the difference between Life Insurance and Life Assurance.
Post Office found that the most common misconception relating to life insurance was related to how the policy pays out. Around a fifth of respondents (21%) believed that a life insurance policy allows the policyholder to withdraw money at any point to cover life events, which is untrue unless you have an investment linked life insurance policy whereby this might be possible.
Most policies only allow for a lump sum to be paid out to the chosen beneficiaries upon the policy holder’s passing. However, it is possible for the policy holder to leave alternative instructions for the pay out, such as being invested or used to pay off outstanding debts like a mortgage for example.
The research found that 53% of respondents currently had a life insurance policy in place, almost half of which (40%) were aged under 35. However, when asked to explain how the pay out of a policy to their beneficiaries worked 18% of those with cover answered, ‘I don’t know’. This means that policy holders did not understand the steps their beneficiaries would need to take in order to claim and receive the pay-out.
This figure rose to 24% of respondents in general, regardless of whether they have a life insurance policy or not – meaning nearly a quarter of UK residents don’t know how life insurance works on the most fundamental level.
But despite over three quarters of respondents (77%) stating they were either happy or very happy with their current policy, Post Office’s findings seem to indicate that many people don’t fully understand the details of the policy they’ve signed up to.
Ed Dutton, Director of Financial Services Products at Post Office explains: “Life Insurance cover is by no means a ‘one solution fits all’, our lives and personal situations are all different and so your policy needs to reflect that. Our findings show that 80% of people were fully truthful about their situation when taking out their policy, which is important because lying on a life insurance application is fraudulent and the more accurate the information given when applying, the more likely it is that the policy will pay-out what is expected if the worst should happen. It’s important to keep your policy up to date given how quickly things can change when it could be in place for 10 years or more.
“However, the biggest issue when it comes to life insurance is the genuine gap in people’s knowledge or misconceptions about how their policy or life insurance in general works. That’s why it is important to do your homework and ensure that the policy meets your needs.”
According to the data, you are actually more likely to take out life insurance when you are younger, with 80% of respondents reporting they were under 45 when they first took out their policy. This might suggest that many customers understand that the younger you are the cheaper the premiums are for life insurance products.
The most common age bracket for taking out life insurance cover was 24-35, which could be a result of this being the most common age for a number of important milestones such as starting a family or taking out a mortgage. The average age for first time buyers in the UK has recently risen to above 30 for every region in the UK according to Halifax, and in late 2020 the average age for first time mothers increased to 30.
However according to the Post Office survey, the life event most likely to encourage someone to take out life insurance was neither starting a family (25%) or taking out a mortgage (19%), but instead becoming financially wealthy (36%). Getting married was ranked as the least likely to prompt respondents to take out a policy, with just 9% of people saying it would influence their decision.
The survey also revealed that men are more likely than women to have life insurance, if only slightly, with 56% of male respondents stating they had life insurance, compared to 51% of women.
Ed Dutton, Director of Financial Services Products at Post Office adds: “Making sure you understand the benefits and exclusions of the cover you have in place is incredibly important. Especially because around 75% of those we spoke to said that providing financially for their family was their main reason for taking out cover. We ensure that the exclusions and benefits about our life insurance products are clear and simple to understand to help people decide whether a policy meets their needs. I’d also recommend making use of helpful online tools such as life insurance calculators to understand the length of cover you need and the amount you’ll require over the term of the policy.”
Other Common Misconceptions
Life Insurance Covers Funeral Costs – 63% of people believed life insurance covers funeral costs as standard. Funeral costs, as well as critical illness cover, income protection and medical costs are all add-ons and are often not included as standard. Post Office Over 50s Life Cover product offers a funeral benefit option but if the customer expects the pay out to contribute to funeral costs without this, that is something they would need to arrange as a private matter through a Will or alternative arrangements.
Life Insurance Won’t Cover You With A Pre-Existing Condition – While a pre-existing medical condition can make it harder to find cover, and may drive up premium prices, it is still possible to find cover. It is important for consumers to shop around because specialist providers will have a solution for pre-existing conditions or circumstances.
Life Insurance Covers You For Life – Life insurance will only cover you for a specific term, for example the length of your mortgage, and will only pay out if you pass during that time. It is possible to be covered for your lifetime, but this is life assurance or whole of life cover. Only 36% of people correctly knew the difference between the two.
Life Insurance Won’t Cover Over 50s – While your age can play an important role in what type of cover you can receive, with the older you are when you apply often meaning the higher your premium will be, it is still entirely possible to get cover later in life. Many providers including Post Office offer specialised over 50’s cover.