Protection insurance: Debunking the myths

  • 29 March 2021
  • 10 mins reading time

You can buy insurance for almost anything. Choosing to protect your home, your car, and your mobile phone may come as second nature. But what about insuring the things you can’t see?

Protection insurance is an umbrella term used to describe insurance policies that protect the intangible aspects of your life. Life insurance, income protection and critical illness cover are all types of protection insurance.

These policies are designed to provide you with a lump sum pay out or regular income payments in the unfortunate event of illness, accident or death. The payments tend to be tax-free and could provide much needed financial support through difficult times.

Arguably protecting our health and income should be a priority. Yet, a recent survey commissioned by Schroders Personal Wealth found that only 28% of UK adults own personal protection insurance.

Could this be due to the fact that there are so many myths surrounding protection insurance? These myths could be responsible for some people putting off buying insurance which aims to safeguard the most precious assets they own; their health and wealth.

At Schroders Personal Wealth, we’re on a mission to provide great value protection, so let’s start by debunking the myths.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

MYTH: It’s too expensive.

TRUTH: Protection insurance is normally cheaper than most people think.

Amongst Brits without protection, 34% said that cover being too expensive was a reason for not having any.

But how much is too much to pay? PwC research in 2020 discovered that most people over-estimate the cost of life insurance with guesses as much as two and a half times too high.

Our research also found that a third of people (32%) said they don’t know approximately how much life insurance would cost on a monthly basis. These figures rose higher when considering critical illness insurance (36%) and income protection (38%).

It’s worth weighing up how much protection costs against the potential benefits, including peace of mind and financial security for you and your family.

We believe that protection insurance is worth every penny (and that might not be as many pennies as you think). Can you afford not to be covered?

Read more: Are your protection policies up to scratch?

MYTH: The policy won’t pay out if I need to claim.

TRUTH: In 2019, a record 98.3% of protection claims were accepted.

Data from the Association of British Insurers (ABI) shows that in 2019, the insurance industry paid out £5.7 billion in protection claims. This is the equivalent of paying out £15 million a day for individual life, critical illness and income protection insurance claims.

Despite this, 53% of Brits say that they do not trust the claim statistics that insurance companies provide. This lack of faith highlighted by the fact that only 22% of people think that most claims are paid out, whilst 31% say that they are not, and a further 47% say that they don’t know.

So why is this? It could be because everyone seems to know a friend of a friend who has had an insurance claim rejected. This of course does happen, but the main reason why protection claims are declined is due to the customer not fully disclosing all information at point of purchase.

It could be a pre-existing condition which wasn’t mentioned when buying a policy or something seemingly trivial like not being totally honest about your smoking status. If you’re uncertain whether a piece of information is significant, tell your insurer anyway.

It’s just not worth the risk.

MYTH: It’s complicated.

TRUTH: It may seem like a contradiction in terms but insurance policies are often deemed as complicated because they provide information for clarity.

You’re not alone if you find insurance policies difficult to understand. One fifth of people we questioned don’t feel that they have enough knowledge to get themselves protected.

It may be this lack of knowledge that lead to many people commonly believing that policy terms and conditions are a way for insurers to get out of paying for claims. In reality they’re actually there to provide you with all the information you need to fully understand what you’re covered for and what you’re not.

In fact, the more vague the ‘fine print’, the easier it would be for insurers to avoid paying out. By providing clear and detailed terms and conditions, you’re fully informed to make a decision about whether a policy is right for you, or not.

Furthermore, an insurance policy is, to all intends and purposes, a legal contract. Although the wording is made as understandable as possible, it also needs to be able to stand up to legal scrutiny. Simple things like the placement of a comma can change the meaning of the policy words.

Our experts could help you navigate your options to help ensure you get the right protection in place to meet your individual needs.

MYTH: I don’t need it.

TRUTH: No one likes to think about becoming ill or dying, but having protection in place could help relieve your family’s financial stress.

No one knows what the future holds and the recent Covid-19 pandemic has made many people realise that life is full of uncertainties. One third of those surveyed stated that they were more likely to consider purchasing protection insurance since the coronavirus outbreak.

This is most likely due to the uncertainty of employment with sectors such as hospitality, wholesale and retail being impacted the most during the pandemic. Our research found that one in five adults are worried about the security of their job.

This makes the need for protection even more apparent. Our experts could help you choose the right protection to meet your needs so that you and your family have a financial safety net in place should something happen to you or your income.

Read more: What if something happened to me tomorrow?

MYTH: I’m not at the right life stage.

TRUTH: You’re never too young, or too old, to consider your responsibilities and protection needs.

Given that half of Brits with personal protection insurance say they chose to take it out for peace of mind (50%), and one fifth (20%) because they had more responsibilities, it is unsurprising that people see certain major life events as more of a reason to take out personal protection.

Just under four in 10 people agree that buying your first home, or having a baby are good reasons to take out personal protection, (37% and 36% respectively). Whilst in addition, just under three in 10 people (27%) also believe that getting married is a suitable motivation for doing so. A further 26% also stated that children starting paid education is a reason to take out protection.

These life events could act as a nudge to consider protecting you and your family against the unexpected.

Insuring what matters the most

Protection insurance could provide the foundation of your financial plan and is worth considering, whichever life stage you’re at.

The last year has highlighted how important it may be to have insurance in place for you and your loved ones. Our experts could help you navigate your options to ensure you get the right protection and ultimate peace of mind to meet your individual needs.

We can’t predict what your future holds, but we could help to make sure that you’re financially prepared.

Source: Schroders Personal Wealth Personal Protection Research, February 2021.

These protection policies have no cash-in value at any time. If you don't pay your premiums on time your cover will stop, your benefits will end, and you'll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you'll get nothing back.

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