Life Cover Payouts - under the microscope

It won't have escaped many people working in life assurance protection that the first implementation deadline of the Consumer Duty Rules is now fewer than five months away.

"Life Cover Payouts – under the microscope", the latest analysis, produced jointly by Swiss Re and Ruth Gilbert from Insuring Change, looks at policy ownership, updating earlier reports on the use of trusts. Viewed through the lens of the Consumer Duty, it considers the actions providers and intermediaries should be taking to fulfil their obligations to consumers.

More new policies in trust

The proportion of all new single and joint life policies placed in trust has been going up since 2018 and increased to 12.6 % of all level and decreasing, term policies in 2021, up from 11.3% one year before.

So, that is progress, albeit modest and, of course, trusts are not the only way to securing policy ownership. A policy may be written on a "life of another" basis and a number of organisations have now begun to nominate beneficiaries within the policy.

The latter might be particularly useful when there is no adviser involved in the process. The customer's expectations might reasonably be expected to be that the proceeds on their death will be paid quickly to their intended loved ones. (A reminder here that just over 50% of new level term policies were taken out without advice in 2021). 

Fewer joint life policies

Overall, the market has seen a shift away from using joint life policies (a topic for debate elsewhere) with 89.7% of all new level term and 92.0% of all new level term with CI policies in 2021 insuring a single life.  

This presents a risk that it leads to more single life policies being sold to or bought by a cohabitee and intended for their partner without ensuring the partner can claim.

Cohabitation

The 2021 census confirms continuation of the upward trend in cohabitation, cohabitees now representing 27.6% of those under 66 living in a couple. Research carried out in 2019 by iptiQ indicates that one in three people living in a couple who bought life insurance were cohabiting rather than married.

The working assumption in the report has been that nearly all policies in trust are single own life cases. On this basis, the 12.6% mentioned above implies a maximum of 16.0% of single own life policies placed in trust in the same period and, consequently, 84% of single life term policies not written in trust.

Consumer Duty priorities

Not everything can be fixed at once but, as recently reported, the FCA has pointed out that firms should pay particular attention to the specific communications consumers are relying on to make their decisions.

In the context of ensuring customers understand what matters about how they set up their policies, clearly the crucial thing is that the money can reach whoever it’s intended for.

Beyond that, for everyone, it’s important the claim can be paid without avoidable delays.  

Recent quadrupling of the time taken for issuing grants of probate or administration threatens to undo the previous advances made in getting money to beneficiaries quickly. For those awaiting an expected payout and at the point when their need for the proceeds can be urgent and immediate, this increases the importance of the policy being set up to avoid probate.

Speed of payment by establishing ownership and avoiding probate is a bonus for all, demonstrating that we can deliver quickly at what is often referred to as the “moment of truth”.

For some, keeping the proceeds free of inheritance tax will be important but will have lesser relevance to the vast majority, having applied to well under 5% of deaths for the last reported eleven years. Although the recent freezing of the inheritance tax threshold until 2028 will mean that more people may leave a tax liability on their death, it should never be the leading message for the mass market.

Ruth V Gilbert Joanna Scott Bekki Murray