Life Insurance: How it Works

In many cases setting up Life Insurance is a very simple process that can take as little as half an hour to arrange. The application and acceptance process of your Life Insurance can be extended if you have significant medical conditions to disclose to the insurer.

You should spend the majority of your time selecting the right type of Life Insurance for you and choosing the right insurance provider for your needs. This is where an insurance broker becomes invaluable. An insurance adviser is trained to analyse your individual circumstances and know where to place your application for the best cover for you.

We have summarised the process of Life Insurance applications, acceptance and claims for you below.

Reasons for cover

There are numerous factors that could have caused you to consider Life Insurance.

• You may have recently lost a family member or friend.
• Taken out a mortgage or loan.
• Started a family.
• Be worried about funeral expenses.

Whatever the reason, there should be a Life Insurance policy available to meet your needs. We are going to focus upon personal Life Insurance policies that are available and discuss business cover at another time.

Types of Life Insurance

The primary Life Insurance plans available are:

• Level Life Insurance – you are insured for a set sum of money for a specified period of time. Ideal for Interest Only mortgages or general family security.
• Decreasing Life Insurance – the sum assured of the policy decreases each year at a set rate until the policy end date. Typically recommended for Capital & Repayment mortgages or other repayment loans.
• Increasing Life Insurance – the policy sum assured increase each year in line with inflation. Often chosen by those who want to ensure that the value of their policy remains the same throughout the term.
• Whole of Life cover – provides a lump sum payout at any point in your life, without a policy end date. This cover is generally used to cover funeral costs, IHT planning or leaving a legacy.
• Family Income Benefit – provides a monthly benefit to your loved ones for the remainder of the plan term. This is normally used for family protection, replacing a spouses wages and covering school/university fees.

Insurance provider

There are numerous insurance providers that operate within the UK and each provide similar, yet quite different insurance packages for their clients. Life Insurance usually falls under the same general description: a set lump sum figure will be paid to your next of kin should you pass within the policy term, provided your payments are up to date and your original application is fully accurate.

Where insurers differ is their underwriting process of Life Insurance applications, meaning the acceptance criteria they place upon a client. Some insurers provide more favourable terms to clients who are overweight than others. Other insurers can be more lenient for those who have had cancer in the past. The list of who is better for which and what, is endless. The tricky part is knowing who to approach with your application for your individual circumstances. It can make quite a difference to the monthly premium that you pay.

Submitting the application

Submitting the application should be one of the easiest parts of setting up Life Insurance as you are simply providing the insurance provider with a record of your health. For many this can be very easy, there are no health disclosures to make and there is no significant family medical history to record. However you would be surprised at how many people we speak to who suddenly remember a medical condition they had forgotten about and had their memory jogged by the application questions.

Where you have medical disclosures to make for yourself the insurer may ask some additional details i.e. medications used, frequency of symptoms, surgeries performed, etc. This is standard across insurance providers and it makes the application process much quicker if you know the details surrounding your condition. Similarly if you have close family members (parents and siblings) who have had significant medical conditions the insurer will likely want to know when they were diagnosed with the condition, so it is best to have that information to hand.

It is vital that any changes in your health that occur between the time that you submit your application and the date that the policy actually starts, are detailed to the insurer!

Life Insurance Underwriting Process

Once your Life Insurance application is submitted it will enter what is known as the underwriting process. This could simply be a two minute online analysis of your application or it can result in the insurer wanting a few extra details. Where possible insurers will provide underwriting decisions online or over the phone and this will typically happen where there are no medical disclosures made, or the medical history of the applicant does not cause concern.

Where the applicant has a more serious condition or takes strong medication, it is possible that the insurance provider will decide to contact your GP surgery for a medical report from your doctor. This should not cause you any concern. The insurer is simply wanting to establish your present state of health and recent medical history from an official medical professional. This can be an advantage in many cases as you can then be assured that the insurance provider has a clear picture of your health at the point of claim.

Acceptance terms

Once the insurance provider has underwritten your application you will be provided with acceptance terms, this does not mean that your policy has started. You will be provided one of two acceptance terms: standard/normal rates, or special/rated terms. Standard rates means that you have been offered Life Insurance for the basic premium available for someone in your circumstances. It is important to note that if you are a smoker the standard terms for your policy will always be higher than those for a non-smoker, regardless of the insurer.

Special terms in Life Insurance typically mean an increase in the monthly premium that you pay in order to have the cover. This step will usually be taken by insurers when there is a concern that your medical history and/or medications that you use, place you at a higher risk of more serious ill health in the future. This is in turn seen to place you at a higher risk of passing at a younger age than generally expected. This is where choosing the right insurance provider for your circumstances is vital and if you do have a significant medical history do not be surprised if an insurance adviser suggests approaching a couple of insurers at the same time, to get you the best terms.

Policy start

Once you are happy with the acceptance terms that you have been offered by the insurer you will then need to choose a start date for your policy. With most insurance providers this can be the same day, tomorrow, next week or the start of next month, the choice is yours. There are a couple of insurers who prefer that their Life Insurance policies are started at the beginning of the next month, but this is often combined with free cover from the date that you accept until the official start date the following month.

Placing a claim

Now this is not a nice thing to think about but it is the whole reason that anyone takes out Life Insurance in the first place. The claims process will differ from insurer to insurer but the general gist of placing a claim remains the same. Upon the death of a person insured on the policy the next of kin need to inform the insurance provider who holds the policy, that the insured has passed. They will then start the claims process for you. The insurer will want to see the original policy document certificate that was issued to the insured, along with a death certificate and possibly confirmation from the deceased GP that they have in fact died and the circumstances of the death.

In addition to this most Life Insurance policies come with Terminal Illness Cover included. This means that should you be diagnosed with less than 12 months to live the policy will payout the sum assured to the policyholder. The claim will need to be fully assessed based upon medical reports from your GP and specialist. You should check with the insurer the end date of the Terminal Illness Cover as this will usually be set between 12 and 18 months before the Life Insurance end date.

Once the claim has been approved the insurer will then pay the current sum assured of the policy to the policyholders next of kin, or those detailed within the Trust (if one has been noted). At this stage it will be necessary to provide the insurer with the bank details of the account in which the funds are to be paid, at which point the claim will be settled.

It is unusual, but not impossible, for claims to not be paid on Life Insurance policies. This occurs when the insured has failed to disclosed vital information on their original application to the insurer. This is where an insurance adviser is worth their weight in gold, as they can talk you through the full application requirements and provided that you are truthful, secure you a policy that details your circumstances accurately to the insurer. Claims will also not be paid on those policies where premiums have not been kept up to day.

Trusts

Trusts are a legal document that tells your insurance provider where you would like the funds of your policy to be paid to in the event of a claim. Not all insurance brokers offer this service and some will charge you a fee for arranging the Trust, we will set up your Trust for free. In the Trust you will need to name your beneficiaries (those the money is intended for) and at least one trustee (those who will approve the payment of funds). Placing a policy in Trust can help reduce any squabbles over who you wanted to receive the funds and can also have Inheritance Tax benefits.

The Financial Conduct Authority does not regulate trusts.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren’t able to resolve themselves. To contact the Financial Ombudsman Service please visit www.financial-ombudsman.org.uk.

So this is how Life Insurance works. We hope that this guide to the Life Insurance process has given you a quick insight into the stages that will need to be taken for you to secure cover. Please click below for a no obligation quote so that we can start helping you on your way to a Life Insurance policy.