Why we are wrong about insurance

Many of us ignore important insurances because we believe we won't be able to claim successfully. But is that fear unfounded?

There is no doubt that there is a protection gap in the UK. That’s the difference between how much protection (things like life insurance and income protection) we need, and how much we actually have.

But what’s more interesting than the size of that gap is why there is even a gap in the first place. Some recent research from Aegon shed a little light on this issue, picking out four key barriers that stop people from taking out such important insurance.

They were:

• price;
• complicated products;
• a complex application process;
• a belief insurers would not pay out for claims.

Mythbusting

The first barrier is a common misconception. The fact is that life insurance can be incredibly cheap, costing £5 a month in some cases, depending on how much cover you want, how long you want it for and whether you smoke. Not bad for peace of mind, knowing that your loved ones will be OK financially if you die unexpectedly.

However, it’s that last barrier that I want to look at in this article. I know expecting insurers to find any excuse not to pay out on their policy is something I’ve been guilty of in the past. But just how accurate is it when you look at protection products?

Let’s take a look at the percentage of claims paid out for income protection, critical illness and life insurance across the major insurers, according to their most recent figures.

As you can see, there are some significant variances in the number of claims approved between the different providers. But with the lowest approval rate of 83%, you’d still have to say that it’s far more likely that your claim would be approved than not.

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Why your claim may be rejected

So why are claims turned down?

There are a couple of main reasons which cover almost all rejections.

Non-disclosure
Non-disclosure is where an insurer turns down a claim due to the policyholder providing incorrect or incomplete information when answering questions about their circumstances during the application process.

The Association of British Insurers introduced a code of practice on non-disclosure to try to reduce the number of claims rejected for this reason, while this April saw the Consumer Insurance Act come into law. This means insurers now have to ask specific questions in order to get relevant information from you when taking out insurance, meaning you are less likely to miss out a key piece of information during your application.

It defines two types of ‘misrepresentation’. The first is ‘deliberate or reckless’, where the applicant knew the information they were proving was untrue or misleading and knew that the information was relevant. The burden of proof here is on the insurer.

In this instance, the insurer may refuse claims and retain premiums “except to the extent (if any) that it would be unfair to the consumer to retain them”.

A ‘careless’ misrepresentation is simply where relevant information was not provided, but it is not believed it was done so deliberately by the applicant.

In this instance, it comes down to what the insurer would have done if the information provided had been accurate. So if the insurer wouldn’t have offered cover, it may be entitled to simply reject the claim outright. But if it would have charged a higher premium, then some smaller payout may be offered.

Conditions not met
The other main reason for a claim being turned down is if the conditions or criteria of the cover are not met.

So this may mean you’ve submitted a claim for an illness that isn’t covered by your plan, or perhaps you don’t meet the definition of being incapable of working set out in your income protection policy.

This just reinforces how important it is to read the small print of your various policies. Make sure you know exactly what cover you are getting for your money. It’s not enough to simply go for the cheapest one!

If you don’t agree

If an insurer turns down your claim and you disagree with the reason given, you still have options. First, try complaining directly to the insurer. If they still don’t respond to your satisfaction, you can take your case to the Financial Ombudsman Service.

For more read How to complain to the Financial Ombudsman Service.

What do you think? Are you put off buying protection because you think any claim would be turned down? Or is there something else stopping you? Let us know your thoughts in the Comments box below.

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