Just under three quarters (73%) of UK life policyholders fail to direct the benefits of their life insurance policies, which causes a beneficiary gap.
This is according to Swiss Re and Insuring Change’s report ‘Life Claims: What matters most’, which stated that these policyholders are not placing life insurance in trust, or failing to nominate a beneficiary.
This risk delays beneficiaries “receiving payments, potentially losing payments, or even payments ending up in the wrong hands”.
In the UK, there are three main ways people can direct their life insurance payouts.
Roughly a quarter of policies are either placed in trust or have a nominated beneficiary.
However, when policies have no direction, the payment will be dealt with as part of the estate.
The first two options, using a trust or directly nominating a beneficiary in the policy, allow for a direct payment to be made to trustees, or, alternatively, the beneficiary named in the policy.
When the payment is left to an estate, the payment will only reach its destination after the estate has been through the probate process, “which can be lengthy”.
Also, payments will not always reach the intended recipient when left in an estate.
Swiss Re said: “If you are cohabiting, your partner may not automatically be the recipient of your payout. Further, leaving the proceeds to an estate means that it is aggregated with other assets and may mean that the estate has an inheritance tax liability where it otherwise would not, depending on individual circumstances.”
The report noted some positive signs as there was a 56.8% increase in uptake on nominations for products.
This research comes as the Financial Conduct Authority (FCA) is pushing to improve claims times. The FCA’s Pure Protection Market Study looks at the distribution of pure protection products to retail consumers.
Swiss Re is urging advisers to address the issue of the beneficiary gap up front with their clients.
Products that allow for beneficiary nomination are coming to market in the UK. At the current rate of adoption, Swiss Re and Insuring Change’s report finds that the beneficiary gap could drop to 27.7% if the whole market adopted this option.
As it stands, 64.7% of new single own life policies are estimated to have been taken out with no direction of death benefits, when taking account of both trust and beneficiary nomination uptake.
Swiss Re Life & Health UK technical manager Ron Wheatcroft said: “Your life insurance payouts need to go to the people you want to benefit – quickly and with minimal stress at what is often a very difficult time both emotionally and financially.
“While it is encouraging to see another increase in the proportion of policies written in trust and in the growing use of beneficiary nominations within life policies, there is still a way to go. As an industry, we need to accelerate the pace of improvement.”
