How the life insurance industry works

From mortality tables and premiums to advice, commissions, clawback and re-broking, find out more about the way the life insurance industry operates.

Old sales methods are disappearing from reputable businesses and are being replaced by new ones which put the emphasis on clarity and good advice

As with tax collectors and second-hand car salesmen, image has always been a problem for sellers of life insurance.

In the film Take the Money and Run, Woody Allen's character Virgil is sentenced to "several days locked in a sweatbox with a life insurance salesman".

It doesn't help that their industry is founded on the premise that those who are likely to die soonest will pay most, and that this calculation is based on detailed mathematical and statistical tools that try their best to strip any human emotion out of the process.

The resultant calculations will determine the premiums a policyholder will pay, and the person footing these bills knows that any cash benefit that may result from their outlay will typically only accrue after they've shuffled off this mortal coil.Life insurance

How life insurance premiums are invested

After it has collected a premium from its policyholder, a life insurance company will invest the capital to try to make a profit and ensure it has the funds to cover its liabilities when it has to pay out.

The longer a policyholder lives, the more premium payments the insurer will receive, increasing the likelihood that the company will turn a profit when the policy expires or matures.

If all this means that the image of life insurers is an understandably hard sell, in years gone by it hasn't been helped by various mis-selling scandals and confusion over hidden agents' fees and commission.

A survey in 2012 found that the face the public most often identified with financial advisers belonged to Del Boy Trotter from Only Fools and Horses.

Life tables

    Life tables - also known as mortality tables or actuarial tables - show what the probability is that a person of a particular age will die before their next birthday.

    Using such tables, inferences can be determined regarding the probability of surviving that year of age, and the remaining life expectancy for people at different ages.

    The first life table was written by Edmund Halley in 1693 and the subsequent development of mathematical and statistical tools in the 17th century led to the establishment of the life insurance industry.

This is hardly the stuff bowler-hatted gentlemen from yesteryear would have envisaged, but the life insurance industry is working hard to improve images of overbearing, commission-hungry graspers.

Old sales methods are disappearing from reputable businesses and are being replaced by new ones which put the emphasis on clarity and good advice.

When people take out life insurance

"People start to think about life insurance when they go through life-changing events," said Mike Preston, business development director at Gocompare.com's partners for life insurance comparison theidol.com.[1]

"So, buying a house for the first time brings a significant debt, and that requires protection. In the event of a death, you don't want that outstanding debt passing on to a loved one.

"The impact of children can also make people consider life insurance. If you have a child, then, clearly, your death will deny them of an income and what that income could have purchased.

"If someone is affected by death, then they often start to think about what would happen to their family, their wife, their children, if they were to die."

Everyone should, says Preston, stare into the bathroom mirror and ask themselves the rather gloomy question: 'What would happen to my family if I was to die?'

Life insurance sales and advice

So, the light bulb goes on. Bingo! You realise you need life insurance. Now, all you have to do is get some. But from where?

There's an old saying that protection is sold. It's very rarely purchased. You have to show people the picture - or let them paint it themselves - of what their life would be like for their family if they were to die
Mike Preston, theidol.com

In the good old days a nice man, probably in a hat, would have knocked on the door every week to collect life insurance from your parents or grandparents.

He would have had a black book and a kindly smile, and at adulthood you may have been introduced to him and his wise words about protecting your future.

But that was then and the old world has been swept away. Now, almost all the responsibility has passed to the individual.

At the same time, the number of people offering life insurance advice has gone down. Changes in the rules in 2012 and the introduction of the retail distribution review (RDR) weeded out the practice of taking commission for selling investment products.

Advisers can still charge commission for insurance products, however, which may be just as well since most people would be discouraged from seeking life cover advice if they had to pay, say, £500 to gain it.

So, in the age of comparison sites, Preston says seekers of life insurance can find advice and buy cover in a now-familiar world.How to get the right life insurance

"A brand like Gocompare.com can help take the place of those advisers that are no longer available," he said.

"Someone needs to fill that void because this generation are used to the comparison world. They go to it each year for their car, home, pet and travel insurance.

"There's an old saying that protection is sold. It's very rarely purchased. You have to show people the picture - or let them paint it themselves - of what their life would be like for their family if they were to die.

"Most people don't want their partner or their children to carry that risk for the sake of, perhaps, only £10-a-week."

Life insurance commissions and 'clawback'

Commission may be a term that had a bad press in the investment world prior to RDR in 2012, but in insurance it's still the accepted method by which a life provider will pay an intermediary for introducing a customer to its product.

Did you know...?

  • A long clawback period is likely to mean that it's in the interests of the adviser to sell you the most appropriate policy that you'll be happy to stick with for the long term

It means there are no up-front costs to the consumer, but the commission is paid over the early years of the policy.

It's worth remembering that comparison sites such as Gocompare.com will often be able to offer life insurance policies with a discounted commission - a discount you may or may not receive if you go direct to the policy provider, or to a broker.

When they sell a policy, Gocompare.com's life insurance partners the idol.com are entitled to a commission fee. By choosing to forego a certain percentage of this fee they hope to be able to offer highly competitive premiums throughout the term of a policy.

If you use our life insurance comparison service, the results table you see with your options will include a field entitled 'You save'. This shows and explains the benefits offered by commission sacrifice on a particular product.

If you're concerned about the prospect of being mis-sold an inappropriate policy by an adviser seeking a commission, it's worth being aware of a mechanism known as 'clawback'.

Under clawback terms, if a policyholder cancels within a certain period of time then the adviser or broker would have to repay a proportion of the commission back to the provider.Umbrella

Such terms will vary, but a long clawback period is likely to mean that it's in the interests of the adviser to sell you the most appropriate policy that you'll be happy to stick with for the long term.

If the policy premiums are too expensive for you to keep paying, or unsuitable in any other way, it may increase the likelihood that you'll cancel the policy, and that the adviser will have to pay back a proportion of their commission.

Re-broking

Even if you already have life insurance, it might be worth considering re-broking. This is where your current policy is compared to new ones on the market, or you renegotiate its terms.

Again with good advice, it may be possible to find more suitable and cheaper policies if your circumstances have changed; for instance, you may have gone from being a smoker to a non-smoker.

But if you're considering re-broking you need to remember that age and health are two of the most significant elements considered when calculating premiums.

As you're less of a risk when you're younger and/or healthier, the older you are the higher your premiums, and if you have pre-existing medical conditions you may struggle to find a deal as good as the one with your current provider.

By Graham Thomas