Too few UK consumers have mortgage protection or life assurance. That means many aren't insured for a rainy day, and some may face a precarious future. John Somerville looks at the scale of the problem and asks how the financial services sector might fix it.
In November 2019, the average outstanding mortgage debt in the UK was £131,724, yet only 50% of the 10.96m households with mortgages had life insurance.
And, according to the Association of British Insurers (ABI) in 2018, only 2.8m households had mortgage protection and a relatively tiny number of households (200,000) had income protection.
These figures illustrate a tendency among UK consumers not to prepare for risks to their financial security or a change in fortunes.
Protection goes beyond mortgage debt and income. For example, the cost of funerals continues to rise. The ‘average cost of dying’ in 2020 is now £9,493 – 3.1% higher than in 2019. That is a sum that many people would struggle to raise quickly.
According to the Department of Work and Pensions (DWP), in 2018/19, 46% of UK households had either no savings or less than £1,500. Around 68% had less than £10,000 in savings.
Yet take-up of protection policies has fallen year on year since 2014. In 2020, only 23.7 million protection insurance policies were in place in the UK – 1.5 million fewer than last year.
So what’s going on?
One of the reasons for this could be that the mis-selling scandals of the past, which continue to blight consumer confidence.
Mis-selling, particularly of payment protection insurance (PPI), has been an ongoing news story for ten years or longer. It’s etched into the national psyche. The scandals, and the payouts that have accompanied them, have been huge.
By February 2020, the Financial Ombudsman Service reported having received more than 2 million PPI complaints. In April it was reported that banks had paid a total of £38bn in compensation.
The mis-selling scandals have fed into the reputational damage suffered by the banking and finance industry since the 2008 financial crisis. Trust has taken a big hit.
There’s widespread fear among many consumers that, even if you buy the right cover for your circumstances, when you need help the insurer will find a reason not to pay out.
This is of course untrue. The ABI reports that 97.8% of all individual claims were paid out in 2018 – an average of £13m each day for individual life, critical illness and income protection insurance claims.
In cases where policies couldn’t pay out, the most common reason was inaccurate or non-disclosure of information by the customer.
Take for example, the social smoker who only has the occasional cigarette once or twice a year. Many of them consider themselves to be non-smokers so when filling out forms will tick the ‘non-smoker’ box.
This illustrates the need for consumers to be guided – to have terms and conditions spelled out so that they don’t make this sort of mistake.
In particular, if cost is concern – as it will be for most people – the adviser can explain the pros and cons of specific policies.
And yet, qualifications are not a requirement for protection advisers and most enter the industry without any relevant training.
The pandemic has made this problem, like so many others, more urgent.
The World Bank recently announced that “Covid-19 has triggered the deepest global recession in decades”. There’s no doubt that an economic shock of this magnitude will have a seismic impact on the personal finances of individuals.
Employment is ever more precarious. And while mortgage repayment holidays have granted reprieve to many, they’ve added to the overall debt and increased the amount of future payments.
Many consumers will want to shield themselves from future shocks. They will be more aware of the threat of sickness and ill health. They will know that times of economic hardship are often accompanied by a rise in crime. They’ll want to secure their homes, but they also need to check their contents insurance.
As consumers re-organise their personal finances, they will need reliable professional advice to ensure they take out the right cover for themselves and their families.
Of course, insurance advisers are required complete 15 hours of continued professional development (CPD) every year. But consumers are unlikely to know that or know what CPD is or what it entails.
Perhaps a dedicated qualification would be a better way to help all regulated advisers – whether mortgage, financial or insurance – to improve and build on their skills for the future.
As we rethink our world and look ahead, we must learn from the past. We need to make sure our clients are prepared for the pitfalls and protected against future shocks.
To do that we need to win their confidence. We need to train and qualify professional protection advisers to reassure British consumers that we’ve got them covered.
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