The pitfalls of arranging your own life insurance cover, health insurance, home insurance and motor insurance online or via price comparison websites have been highlighted in new guidelines by the Association of British Insurers (ABI).

Insurers, eager to provide a rapid-response “quick quote”, sometimes fail to ensure that the customer understands the terms of the insurance cover being offered. Customers buying life insurance and other insurances online, rather than with the help of a financial adviser, must currently beware of inadequate information in four key areas:

• Insurance policy information: the key features of the life insurance or health policy may not be clear online
• Which aspects of the insurance policy are “add-ons”: not all features of an insurance policy may come as standard, some may need to be specially requested, at extra cost
• Excess levels (motor cover): voluntary or compulsory excess levels may not be made clear online
• Referrals: where a customer cannot be covered, he should, but may not, be given a clear referral to an alternative provider

Furthermore, online applicants are often not informed of assumptions that the lender makes about them, when compiling their quote, and may be unaware of the exclusions contained in the “small print” of a life insurance policy, a health insurance policy, or home and motor cover.

By buying life insurance through a financial adviser, however, consumers will have the conditions and exclusions of their policy explained to them, so that they are fully aware of what is covered. An adviser will also guide them through the sometimes complex application process, which can be a minefield for the uninitiated. Neglecting to provide a specific, perhaps minor detail of your past health history can be enough to invalidate a future claim.

Furthermore, an independent adviser can take a ‘whole of market’ approach to ensure that he locates the life insurance policy that is right for you.

The list of concerns the ABI has raised serves to highlight for consumers the pitfalls in the small print of health cover.

The primary concern for the ABI is to work towards an industry-wide consensus on the definition of Total and Permanent Disability (TPD). 

It is also important for consumers to understand that TPD is often treated as an add-on part of a health insurance policy, and that those policies that do include it in their cover can contain exclusions that apply solely to the TPD element.

In the case of certain Legal & General health policies, for example, one definition of TPD is a situation where the assured ‘is totally unable to follow his/her own occupation and in the opinion of Legal & General’s Chief Medical Officer is likely to remain so permanently. 

Another definition of TPD used for other L&G policies is that the assured be unable to perform at least three of the following activities: walking 200m unaided; getting into or out of a car or bending to pick up an object from the floor; communicating by answering a phone and take a message; reading a daily newspaper with glasses if needed; writing legibly without aid; and climbing a flight of stairs without stopping or suffering severe discomfort. 

Some of the specific terms to be addressed include the following, in relation to health and critical illness insurance: 

Cardiomyopathy: this technical medical term must be explained to consumers as inflammation of the heart muscle, and the symptoms of breathlessness and chest pain should be mentioned. 

Rheumatoid arthritis: it should be made clear that rheumatoid is a specific type, as there are various other types of the disease which may not be covered. 

Severe inflammatory bowel disease: consumers must not be allowed to confuse this with the less serious condition of irritable bowel syndrome. 

Severe specified mental conditions: it must be clear to consumers that policies can require a stay of at least 8 days in an NHS mental hospital, in order to qualify for cover.

Furthermore, not only new customers, seeking to insure themselves for the first time, stand to gain from the more competitive environment and cheap life insurance policies.

Those who have a life insurance policy already in place can be pleasantly surprised if they check with their financial adviser to examine the latest deals available. The fall in the price of life insurance over the past 5 years alone has meant that it can be cheaper for a consumer to take out a new life policy, rather than continue with an old one – despite the fact that the policyholder is now older. 

Rewards for healthy lifestyle choices 

Furthermore, advances in nutritional knowledge are changing the way that insurers look at lifestyle issues, and healthy lifestyle choices are now beginning to have a positive impact on the price of premiums. 

People who do not eat meat, for example, are now regarded as being 40% less likely to suffer from certain forms of cancer, and are also 30% less likely to suffer from heart disease*. As a result, they are increasingly regarded as a desirable customer by insurers and benefit from cheap life insurance.

The UK insurer Animal Friends, for example, is now co-operating with Liverpool Victoria to offer premiums to vegetarians that are on average 6% cheaper than competitors. 

*Source: Animal Friends Insurance Ltd.

In its new document ‘People Need Financial Protection’, the ABI refers to the current ‘uncertain economic outlook’ and warns consumers against ‘a sudden loss of income, perhaps through unemployment, ill-health, or even the unexpected loss of a family breadwinner’. 

In addition to health issues, insuring your ability to repay debts was crucial in order to avoid damaging your credit rating, and therefore your ability to borrow money in the future, the ABI said. 

The ABI recommended the following insurances as part of a sustainable and balanced household financial plan. 

Life Insurance – To provide a tax-free lump sum or regular income in the event of death

Critical Illness Insurance – To pay a tax-free lump sum if you suffer a specified critical illness such as cancer, heart attack, or stroke

Income Protection Insurance – Pays a regular income if you are rendered unable to work through illness  or injury

 Unemployment Cover – Pays a regular income or covers debt or mortgage repayments if you lose your job through no fault of your own 

Consumers without a ‘buffer’ of savings to sustain them in the event of unemployment were particularly well-advised to ensure they had adequate life cover, health cover, and criticial illness insurance cover, said the ABI.

The comments followed a case where an insurer turned down a payment protection insurance (PPI) claim, quoting a clause blocking claims where the insured ‘became aware of any increase in the risk of unemployment’ during the first three months of the policy. 

The customer took his claim to the Financial Ombudsman Service (FOS), which upheld his complaint. The FOS criticised insurers over vague wording of clauses which could be used to turn down valid claims. 

Clauses excluding cover to individuals who become ‘aware of any increase in the possibility of redundancy’ are designed to protect insurers against claims from policyholders who took out cover, knowing that they were likely to lose their jobs. 

However, the FOS said the wording of some PPI contracts was so vague that any downturn in the UK economy during the first three months of a policy could be interpreted as rendering customers aware of the possibility of redundancy. This could then exclude them from cover. 

Consumer groups such as ‘Which?’ have stated that in the current general economic downturn, the vague wording of exclusion clauses could be used by insurers to turn down valid claims.

The comments highlighted the need for insurance applicants to have their financial adviser clearly explain the ‘small print’ in their insurance policy.

The ABI pointed out that some insurers do ask a specific question in their insurance application form, to assess if the applicant has any awareness that he is likely to be made redundant. It was important for applicants to understand that such knowledge could void their policy, the ABI stated.

Defined contribution pension schemes are those into which an employer pays a regular contribution, fixed as an amount or percentage of the employee member’s pay.

Under pensions law, the ‘Open Market Option’ enshrines the employee’s right to look at all pension annuities available on the market, as part of his retirement planning. The ABI survey revealed that of those surveyed, only 62% of people had been aware of this.

Your pension fund manager should provide you with an estimate of what your pension fund is worth, six months before you are due to retire. Shopping around for the right pension annuity for your retirement is not only advisable but crucial, given that once your choice is made, there is no going back. You are required to stay with your chosen annuity product for life.

What type of annuity?

There are many annuity providers on the market, and there is no requirement to buy your annuity from the company that managed your pension fund. There are also many types of pension annuity available.

The first choice to make is to identify who should benefit from your pension. A single life pension annuity pays out only to you, and ceases when you die. However there is also the joint life annuity, which will continue to pay your spouse after your death, until they die, or can also pay your children, for an agreed term.

The with-profits pensions annuity continues to invest your pension in funds, and as such can achieve a higher income for you year upon year – although your income also has the potential to fall, depending on how those investments perform. However, some with-profits annuities have a guaranteed minimum payment built-in.

A flexible annuity also invests your pension in funds, and links your income to the performance of those funds. The very popular ‘flexible’ option refers to the fact that you can, within limits, vary the amount of income you take, from month to month.

An enhanced pension annuity offers a higher regular income to those with health problems, based on the assumption that they will not be drawing their pension for as long as a person in full health.

But using the lump sum from your pension fund is not the only way to purchase an annuity. If you have savings or funds that are not invested in a pension fund, they can be used to purchase an immediate life annuity, which effectively turns your savings into a regular lifetime income.

The ABI consumer research surveyed over 2,000 defined contribution pension customers in May and June 2009.

This was the recent warning from the Association of British Insurers (ABI) highlighting the dangers for consumers of cancelling life insurance and home insurance cover, as they tighten their belts in the current financial climate.

New figures released today by the ABI show that in the past year, 13% of people have cancelled their life insurance cover in a bid to cut their spending.

A further 21% have said they are ‘seriously considering’ reducing the amount they save, or stopping saving altogether, while, at the same time, 45% of people would like to be able to save more.

Nearly a quarter of people have cancelled or not renewed home contents insurance, and 17% have cancelled or not renewed building contents cover.

As a result of such financial economy measures, nearly half of those surveyed (49%) said that they were now concerned at their inability to cope with an unexpected event which their insurance would have covered.

Shop around for your insurance cover!

The ABI in a statement pointed out that ‘the insurance market remains very competitive, so shopping around can help you get a good deal, while ensuring that you are not at the mercy of the unexpected.”

Ditching insurance or reducing cover should only be ‘a last resort’, the ABI claimed.

ABI survey was carried out at the beginning of this month, using a sample group of 2.072 adults sourced throughout the UK.

They say that the ostrich, rather than facing up to a threat or a problem, buries its head in the sand, in the hope that the problem will simply go away.

Why does ‘ostrich syndrome’ appear to touch a nerve with all of us? Perhaps because it is an inclination with which we all identify – the inclination to let things drift, rather than take action to rectify them.

Evidence of ‘ostrich syndrome’ came up again this week, as new data showed that many of us are unhappy with our retirement planning, but are unwilling (or unable) to do anything about it.

The Association of British Insurers (ABI) questioned over 2,000 adults throughout the UK and discovered that, from this random sample, 44% of women and 38% of men are concerned that their retirement planning and pensions provision may be inadequate.

The new information seems to confirm the findings of a recent BBC survey, which suggested that half of UK adults between 20 and 60 are setting aside nothing for their retirement.

One compelling image that sums up the need to take action about your pension features in a current tv advert. A woman climbs on to a high diving board 10m above a swimming pool. As she prepares to dive, we see that there is no water in the pool below.

The message is clear: moving towards our retirement without savings or other provisions is (financially) as dangerous as launching ourselves earthward from a diving board, with nothing to break our fall.

Act now, to fill your ‘pension’ swimming pool, before it’s too late!