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Insurance myths leave many families poorly protected

Updated 05 December 2022

5min read

Nick Green
Financial Journalist

The pandemic has prompted Brits to reassess their finances – in particular, areas like life insurance. But with pet insurance more than four times as popular as critical illness cover, and lots of misinformation about, have we got our priorities straight? Article by Nick Green.

Life insurance myths

It takes more than a global pandemic to change the deeply ingrained habits of the British. Apparently we still worry four times as much about the cost of our pets’ illnesses, compared to our own. Meanwhile, when it comes to protecting our finances from the effects of illness, we’re uncommonly cynical and pessimistic.

A new report by insurance specialists Drewberry reveals much public confusion on this subject – in particular the big four of life insurance, critical illness, income protection and health insurance. The pandemic has prompted most adults (around six in 10) to think more about their financial stability, while one in six say they are now more likely to take out life insurance. Interest in critical illness and income protection cover has also risen significantly.

Even so, most aren’t following up on these good intentions. There are two reasons. Firstly, the pandemic must have made all such insurance more expensive. Mustn’t it? Secondly, insurers often refuse to pay out anyway. Don’t they? At least, that’s what many people assume. But what actually is the reality?

The myths around Covid and life insurance

The argument goes something like this. Lots of people have died prematurely as a result of Covid, so life insurance companies have had to pay out millions more than usual. Therefore, the cost of life insurance must have risen – and the same ought to apply to critical illness cover. Sounds logical, doesn’t it?

The Drewberry report found that over 70% of us believe life insurance (and the other big types of protection) had all become more expensive since the start of the pandemic.

Furthermore – so the argument goes – the sheer number of claims that insurance companies will have faced must mean that many of them will have found excuses not to pay out. Nearly half (44%) of people surveyed believed that insurers paid out on less than half of all Covid-related claims. Furthermore, 15% of people said that this refusal to pay out was the main reason they wouldn’t take out such insurance.

Again, it sounds very logical. The problem is, it’s not true.

To start with, people have always had trouble guessing how much life insurance actually costs. In an earlier study in 2018, Drewberry asked for estimates of how much a particular (fairly standard) policy would cost. The average estimate for the premium was £42.74. The actual premium was £14.35 – a difference of nearly 200%.

But surely Covid must have pushed premiums up? Claims have certainly risen, to the tune of £202 million in 2020. But in 2019 the total life insurance payout was over £3 billion – which helps put the Covid figures in context (they amount to under 7% of that figure). So life insurance companies are not exactly heading for the lifeboats.

It’s possible that some premiums may rise a bit, but currently there’s little evidence of it. Critical illness cover is a useful yardstick here. Again, 7 in 10 people expected the cost of this to have risen. But, says Drewberry director Tom Conner, ‘We have not found this to be the case either. Throughout the pandemic we’ve continued to arrange critical illness cover for clients, without seeing a spike in premiums.’

So what about the other big factor that puts people off taking out insurance? The widespread perception is that insurance companies often refuse to pay out on claims – perhaps even in a majority of cases. Following on from this, it’s widely presumed that Covid must have made this bad situation even worse.

But, outside the odd sensational tabloid headline, the reality is very different. Figures from the Association of British Insurers reveal that in 2020, 96% of personal life insurance claims relating to Covid were paid out, and 99% of group claims. And these figures are fairly typical of life insurance, critical illness and income protection cover in general, where a pay-out in over 90% of cases is standard.

However, in the Drewberry survey, just 12% of respondents correctly guessed this ‘90% or above’ pay-out rate. ‘Clearly, there’s work we need to do as an industry to improve clients’ perceptions of protection,’ says Tom, who warns that this ingrained cynicism surrounding insurance is harming people’s financial security. ‘At the moment, it seems too many clients see financial protection as not only expensive but also unreliable. As long as this persists, people will continue to be put off buying cover that could make a huge difference to their lives in a time of need.’

Protection? Pets take priority over people

Despite the public’s deep-seated suspicion of insurance, the pandemic has prompted more interest in the various forms of financial protection. The research found that one in five people (18%) are now more inclined to buy life insurance, and there’s almost as big a rise in the numbers of people considering critical illness cover and/or income protection. But the numbers who actually took out these products in 2020 were still fairly low: just under 10% took out life insurance, under 4% bought critical illness cover, and only 1% bought income protection.

By contrast, 16% of people bought pet insurance – more than all of the above combined. This is despite the fact that not everyone has pets, but everyone has a life! Evidently, people know and expect that their pet could have health problems that need paying for, but are much less inclined to believe that they themselves could have health problems that might stop them working (or worse, cause their premature death). Although these scenarios may be less likely, the consequences are far more severe.

So are people simply in denial? Again, it’s not as simple as that. The research found that more than half of adults (56%) are trying to save more as a result of the pandemic. The reasons given are either ‘for a rainy day’ (58%) or in case their lose their job (25%). So people are perfectly willing to consider unpleasant prospects and try to mitigate against them. Unfortunately, they may not be choosing the best way to do this.

Tom says, ‘While more people are saving than before, which is good news, that doesn’t necessarily prepare them adequately for major financial shocks, such as developing a long-term health condition, in the same way protection insurance would. Protection is the best safety net in times of great financial uncertainty.’

It turns out that personal insurance – whether life insurance, critical illness cover or income protection – is both far less expensive and much more reliable than most of us think. As a nation we are broadly aware of the need for it, and the pandemic has only sharpened this awareness. The only real obstacle therefore is knowing what kind of policy to go for and which provider to choose. This is where a specialist financial adviser can make all the difference and help you achieve genuine financial security, if and when the next crisis happens.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.