Archive for June, 2008

Demystifying Life Insurance

June 19th, 2008

You don’t have to look far into the life-insurance industry to realise the huge scale of the market.
 
Life insurance is a long-term insurance and with death being inevitable is it any wonder that this form of insurance contributes a large part to the insurance industry.
 
According to the Association of British Insurers (ABI) there were 262 businesses authorised by the Financial Services Authority (FSA) to conduct business in long-term insurance in 2006. 
 
In that year, a total £17 million was paid out in death benefits every day.
 
It is a huge industry in the UK and, as is often the case with important investments, people seeking life insurance can find it difficult to access the right information and the policies. 
 
The ABI figures show that independent financial advisors sold 63 per cent of long-term insurance policies.  Financial-advisor sales contributed 47 per cent of total long-term insurance sales only a decade earlier.
 
In most cases people trust financial advisors to demystify life-insurance matters.  But insurance is a subject that should be understood by the individual who takes out the policy.  It is the only way they can be sure they have policies that makes them comfortable.
 
There is any number of packages available but the two basic options for life insurance in the UK are term insurance and whole-of-life insurance.
 

Term Insurance


Term insurance is simply a policy that will pay out in the event of the policyholder’s death within a set timeframe.  If the insurance policy expires then there is no payout.  Policies of this nature can be negotiated for 5, 10, 15, 20… years. They are very flexible and the negotiation of terms is necessary.
 
Length of expiry is not only the terms that should be considered.  For example, term insurance can also be written under joint names so if one of the policyholder dies the other will receive the payout.
 
There are also many other issues to consider and the FSA provide a comprehensive list, some of the more important conditions to be agreed upon are flexibility, cost over the life of the policy and payout structure (lump sum or income). 
 
For example, some term policies have decreasing life term insurance were the policy is cheaper the closer it gets to expiration, some policies increase in cost the closer they get to expiration. 
 
These are the basics and it is important that anyone considering term insurance does their homework.
 

Whole-of-life Insurance   

 
This form of insurance is more expensive than term insurance because the policyholder will be covered until death and the beneficiary will receive the payment.  However, there is flexibility in the execution of the policy if the policyholder has a fatal illness they can get paid out early. 
 
This form of insurance is becoming more investment orientated, with policyholder allowed to manage policy as part of their investment strategy.  There are also tax considerations so it is important that when taking out a life-insurance policy, the policyholder discuss the ramifications of that decision with a financial advisor.
 

Where to get information?  

 
There was a time that customers went to a life insurance broker but after the Insurance Brokers (Registration) Act 1977 and subsequent regulation of long-term insurance by the Financial Services Authority the role of the insurance broker has changed and life insurance is no longer commonly offered by a general-insurance broker.
 
As the ABI figures show there is an increasing number of customers who are relying on financial advisor to manage their life insurance.
 
There is another change to the insurance market and that is online brokering.  The advantage of the online purchase of life insurance is obvious.  A customer is able to compare policy to find the right one for them.  Whether it is a low-cost life insurance or one with more flexible conditions, a customer is able to evaluate the different products quickly.
 
In the early days of online brokering of insurance there was a push from insurance companies to simply develop a presence on the web and the rest would look after itself.  The brokers, who used the web to sell to clients or provide leads for insurance companies, quickly followed suit.
 
Now online insurance brokers are much more customer drives with tools available to define the best life-insurance policy for their needs.  Many online insurance brokers also provide a glossary of terms so that customers can better understand the policies they are interested in purchasing.

Even with the increase of consumer focus in the online insurance industry, a buyer should not blindly accept conditions and recommendations of an online broker but also seek out professional advice when decided on a policy.
 
This information is also available online.  The FSA provide information on what a people should consider when deciding on a policy.

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