It’s meant to be the ultimate safety net to protect you and your family at the worst of times, but life insurance can be sold by just about anyone and salesmen get kick-backs of hundreds of pounds for doing it.
The consequences of buying an unsuitable product are huge and can leave people with rejected claims or without adequate payouts at incredibly stressful family moments, including death or serious illness.
And even if the policy will pay out, there are concerns people could be overpaying by thousands of pounds in premiums, as unqualified salesmen push policies in exchange for huge referral fees – hardly an incentive for working in the customer’s favour.
Insurers typically pay £600 for a successful sale of life insurance or protection products, which includes critical illness cover and income protection.
But anyone from estate agents to payday loan providers can get their hands on the lucrative kick back because, unlike other areas of the financial market, qualifications or passing exams are not a legal requirement.
And a set of new regulations from the Financial Services Authority (FSA), which took effect at the start of the year, mean this could become an even bigger problem.
New rules kept commission on protection
Commission payments – effectively kick-backs for selling a particular product – were banned in December in an effort to make the financial market more transparent for consumers.
The changes also meant that people selling investment products had to pass exams to demonstrate a decent level of market and fair sales knowledge.
But crucially the Retail Distribution Review (RDR) didn’t include life insurance or protection products that were not investment-linked.
As a result of missing out on commission in other areas, or not wanting to take exams, it’s thought that more unqualified or untrained people will move to making protection sales to pocket the handsome reward.
Insurers are now carefully monitoring where their commission payments are made; watching for spikes from pay day loan providers, credit companies and parts of the mortgage market that might not be well placed to make insurance sales, industry sources told Yahoo! Finance.
The FSA defended its decision not to include professional requirements and exams to sell protection and life cover when it made the changes. “We don't think the same problems exist in these markets as are evident in investment advice,” a spokeswoman said:
"The overall picture in the pure protection market is of a falling number of complaints to the Financial Ombudsman Service (FOS) and an absence of the kind of large-scale mis-selling episodes that have been seen in the investment advice market.”
But Kevin Carr, chief executive of Protection Review, disagrees. “We expect more advisers to focus on protection than ever before, in part because commission is staying,” he told Yahoo! Finance.
“If some are not familiar with the protection market they could be selling products without understanding the options... Cover can vary greatly and people could receive inferior policies.
“A compulsory exam or training should be in place before people are able to sell. But until the regulator implements this, we run independent training to help advisers understand the market.”
Adam Price from VouchedFor added: “I cannot think of a situation where I would recommend someone seek the guidance of an ill-trained salesman for something so important.”
Dangers of buying unsuitable policies
Buying policies from someone lacking expertise could mean paying more than necessary for many years in exchange for a poor value product. Alternatively, sales of easier to flog cheap policies, which inevitably provide less cover and can often fall short of a customer’s expectations, could be targeted.
Customers are not likely to realise they have in effect bought a useless policy until it comes to making a claim, this could be decades later and at the worst possible time.
Chris Hargreaves, who runs a chauffeur business, knows only too well about buying unsuitable cover. He was refused a claim on his income protection policy, which is supposed to cover your salary when you can’t work, when he was hospitalised for internal bleeding, a blood clot on his lung and suspected cancer in 2009.
However, the type of policy he had bought would only pay out if he couldn’t do “any” job at all and used certain tasks to decide whether this was the case. As he passed a number of these tests, including holding a pen and reading 16-point font, it was deemed that he could, in fact, work – albeit not in his own line of work.
The insurer blamed the company that sold the policy for not properly explaining the details of how it worked and selling it to Hargreave’s when it was not suitable to his circumstances. After a three-year battle, the Financial Ombudsman Service (FOS) finally ruled that Hargreaves was entitled to a payout from the insurer. But his plight highlights the problem with buying unsuitable products.
Tom Baigrie, managing director of LifeSearch, said: “There’s a lot more to properly protecting yourself and your family than price... Advisers can do a great job of guiding you through the maze to the best deal for you. As ever, it’s best to shop around and check they know their stuff... Specialists are always better than generalists."
But insurers believe they are right to keep the kick-backs in place, for fear without motivated salespeople, people wouldn’t bother with cover.
Mike Farrell, head of protection sales at insurer Liverpool Victoria, said that it’s right that the FSA allowed commission to stay. “Protection has to be sold rather than bought,” he commented.
As many people in the UK are under-insured in terms of protection, he said that “it’s better to have something rather than nothing”.
Should insurers do more?
However, Hargreaves thinks insurers should be doing more to make sure their customers aren’t ending up with the wrong policies. He is now campaigning for abolition of the type of income protection he was sold.
He commented: “When consumers take out protection policies they are putting a lot of trust and faith into the company providing the policy… A lot of people take out these policies only to satisfy banks, mortgage companies etc… The insurer should do more to ensure their policyholders have the correct policy… People will pay more if the policy does what it is supposed to do.”
Do you believe people buying life insurance and protection sales should be controlled by stronger regulation? Is it right that insurers pay commission for sales?
If you feel annoyed about the issues you raised you can email your MP about it. Email addresses can be found here or you can search by postcode and send them a message here.
You can also follow Chris Hargreaves' campaign against task-based income protection on Facebook or Twitter.