Life Insurance: why inflexible, 25-year policies make no sense
Aside from life insurance, there is no other insurance product that keeps consumers tied in for 25 years, with little to no flex to their policy. Phil Zeidler, co-founder of DeadHappy, argues that this outdated approach is leading to consumers hugely overpaying for insurance policies – to the tune of £1.2bn per year - that aren’t even fit for purpose
It’s not rocket science to figure out you’re more likely to die when you’re older, than when you’re younger.
Therefore, it doesn’t make any sense that people are paying the same monthly amount in life insurance when they are 35 and when they are 50.
Life insurance premiums should be priced by age and risk level, meaning the younger and healthier a person is the cheaper the policy is. However, most insurance policies are set up where the price is averaged over 25 years, meaning consumers are overpaying in the earlier 15 years to compensate for the later 10 years.
The other issue with these long-term inflexible policies is that lives significantly change over a 25-year period, and so what suited you at one point is very unlikely to suit you a few years down the line. Life can be messy - your relationships, health and situation can completely change.
This is why people cancel their life insurance every seven years on average – they realise that the policy they took out is no longer fit for purpose. If people only ever get to seven years, they are constantly stuck in the ‘overpaying’ part of the 25-year insurance cycle. Which leaves you with two options – either continue with a policy that no longer meets your needs, or cancel it, knowing you have overpaid for the past seven years and start over again.
It’s this combination of overpaying and cancelling that is resulting in a staggering £1.2bn being overpaid by UK consumers every single year.
So what is the solution?
There are two options. Either life insurance needs to come in line with all other insurances and be provided on an annual basis or continue to be offered on a longer-term basis, like it is now, but with the allowance of flex along the way. That way, the policy is the right fit for each person whatever stage of life they are in. People will pay for the insurance they need now, not down the line; putting a stop to the overpaying problem.
The whole issue is really all tied in with our general lack of desire to talk about death, and what we want to happen when we die. Death is one of the few certainties we have in life and we need to become more comfortable thinking about what we want our life insurance to do – whether that’s repay a mortgage, be a cash lump sum to help our families cope financially or something totally different like sending your friends off for a once-in-a-lifetime holiday to Vegas.
Recent research we conducted showed that four in 10 of us think that most people are in denial about their own demise and don’t think about it until it’s too late to make the necessary arrangements. We want to encourage people to take a more proactive approach to planning it – and a part of that is ensuring the life insurance you have in place is actually right for you.