Nearly a fifth (19%) of people would only be encouraged to take out a life insurance policy once they had a mortgage, according to research from Post Office. Making being a homeowner the second most important milestone to customers considering taking out cover, with starting a family taking the top spot.
A number of mortgage lenders sometimes make life insurance a condition of advancing the loan – although you are under no compulsion to buy any policy they may offer you, and are free to seek your own cover.
This is because certain life insurance policies are a way to ensure the mortgage will be paid, in the event of the policyholder’s death.
But what if you are not currently on the property ladder, or ever plan to be, do you still need to have life insurance?
Well according to Ed Dutton, Director of Financial Services Products at Post Office, as with most things it depends on your personal situation. He 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.
“It’s important for any individual considering taking out life insurance to take the time to properly evaluate their individual needs and what it is they want covered. In its simplest terms, life insurance covers your life and so will provide a cash pay out to those who may be financially impacted by your death whether that’s paying for the mortgage or rent commitments for example. It’s clear 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 which is why it’s vital to do your homework or speak to a trusted brand such as the Post Office.”
According to the Post Office survey, 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[1], and in late 2020 the average age for first time mothers increased to 30[2].
Common Misconceptions
The most common misconception relating to life insurance was related to how the policy pays out; with around a fifth of respondents (21%) believing 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.
The study also revealed that around two fifths (38%) of us are unable to correctly explain the difference between Life Insurance and Life Assurance.
Other 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 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.
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.
