Insurers are increasingly relying on health data collected by devices such as smart watches to determine the ongoing level of premiums that we pay for life insurance cover. While that may be an alarming invasion of privacy on the one hand, it makes sense from an economic perspective on the other. This paradigm shift can’t be ignored.
In the US, John Hancock Insurance, only accepts policyholders who collect health data through wearable devices. In the UK, providers like Vitality collect data via technologies such as Apple Watches or Fitbits to incentivise policyholders to live a healthy lifestyle. Exercise, meditation and a balanced diet result not only in lower risk for the life insurance provider, but also lower premiums for the customer. This fairly recent development has set the direction of travel for the industry.
Life insurance companies have been studying medical data for decades and there is a clear link between exercise and increases in life expectancy. The NHS has published guidelines stating that to stay healthy, adults aged 19-64 should do at least 150 minutes of moderate aerobic activity per week and strength exercises on 2 or more days a week that work all the major muscles (legs, hips, back, abdomen, chest, shoulders and arms).
Your health is your wealth and statistics don’t lie. Cancer Research UK reveals that cancer will affect every second person during their lifetime and the British Heart Foundation highlights the fact that 170,000 people will die from heart and circulatory disease every year.
Depending on the sums assured, insurance providers generally require medical underwriting to evaluate your health – this could for example involve blood tests and doctor reports. Premiums are evaluated individually and, by demonstrating a certain level of wellness, your insurance premiums will be less than you would be quoted otherwise. Positive indicators mean that you could not only have lower premiums in the present but also in the future.
Apart from potentially lowering your insurance premiums, ‘physical wellbeing’ has recently been established (by way of extensive research by Gallup) to be one of the five ‘universal elements of overall wellbeing’ and an indicator of a life well lived. So perhaps, rather than seeing life insurance as an expense that reflects your death, it might help if we all viewed it as an opportunity to review our wellbeing. Not least of which because your chances of developing a serious illness are significantly reduced.
If you are interested in learning more about improving your wellness, protecting your business and reducing the cost of implementing employee benefits, I’m hosting an evening event ‘Financial Wellbeing and Protection for Entrepreneurs’ with Personal Trainer James Donnelly in the City of London on Tuesday 9th July 2019 from 18:30. It’s a free educational event and your future self and dependents will be grateful if you attend! Click here to find out more and book your space.
Life Insurance Explained
In exchange for a premium, life insurance pays out a monetary lump sum (benefit) to a named beneficiary should the insured person pass away or suffer from a terminal illness (TIB). TIB payouts occur should the person insured have less than 12 months to live. The policy can be held by the person insured or by a third party (provided that they have an insurable interest).
Conceptually, life insurance dates to the Roman period, but the first company to actually offer life insurance in the modern sense was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706. The necessary statistical tools were then developed in the 1750s, resulting in the first sales of life insurance in the 1760s.
When and Why Consider Life Insurance?
Theoretically, it is hard to understand why you should pay premiums for something that may not pay out at all (if you outlive the term of your insurance) and from which you will not directly benefit. This means that some people ignore it. However, in practice most people I speak with want to protect their loved ones from being financially burdened in the event of their death.
At the end of the day, the decision is simple: you can assume the financial risk yourself or offset it by paying a premium to a provider who will assume that risk on your behalf.
You are covered as long premiums are paid so have the option of cancelling their policy at any time. However, this also means that if you stop paying the premiums, you’ll have no cover at all, and your policy will not have any surrender value. So, you really do need to be committed to paying the premiums for the long-term. At Lyfe Wealth, we therefore make sure that your premiums are affordable over the long-term to spare you the pain of having to cancel your cover should you be under financial pressure.
A Significant Gap in your Planning
Our empirical research suggests that every financial plan has merit but does often fail to include any form of contingency planning. Basic life, critical illness and income protection plans are sometimes not even included in the footnotes.
Generally, employees assume that their workplace benefits will provide them with adequate cover. The reality is that 3 out of 4 people are not aware of benefits they have and fail to realise that the policies belong to the employer and not the employee. This could spell trouble down the road in terms of obtaining cover should you wish to become self-employed in the medium term. This is the reason why we recommend to our clients that they should have a personal baseline level of cover which is independent of their employer.
Lyfe Wealth is an independent and regulated firm of Chartered Financial Planners. We have a fiduciary duty towards the client to ensure that any recommended cover is suitable and appropriate to your circumstances.
Life Insurance – Term or Whole of Life?
Term Insurance Cover
This form of protection is available until the age of 90 and can be suitable if you wish to cover:
- Your repayment mortgage
- Your children’s education
- Insufficient employer death benefits prior to retirement
Whole of Life Insurance
Term insurance normally covers you up to age 90. However, if you’re aged 40 to 45 and fit and healthy, there is now an average 50% chance that you will outlive 90 according to the UK Office for National Statistics. Therefore, it’s also important to consider whole of life insurance which will pay out when you die, whatever your age.
The downside is that whole life insurance is around three times more expensive than a term that simply covers you to age 90. However, as the case study below illustrates, it can be an attractive and cost-effective way to leave a meaningful legacy.
Critical Illness Insurance & Income Protection
What events might warrant a discussion around Life Insurance?
Life insurance is most commonly taken out by those under 50. It’s almost never the wrong time to review your insurance provision, but there are various trigger points when it really is essential, which include:
- Taking out a mortgage
- Starting a family
- Inheritance Tax planning
- Leaving a legacy
Why would you want to write your life insurance in trust?
Putting a protection policy ‘in trust’ can ensure the death benefit is paid to the right people, as the trustees have a legal obligation under the trust to use the proceeds for the sole benefit of the named beneficiaries.
By putting a plan in trust, you can avoid the need for probate or confirmation, provided there is at least one surviving trustee following your death. Because the trustees are the legal owners of the plan, they can deal with it immediately and make sure the funds are distributed as soon as possible.
Starting a Family
Gemma and Brian Fisher are in their 30s and are about to start a family. They have a £500,000 repayment mortgage over a 25-year term and they want to ensure that they are protected in the event that one or other of them should die. They’re non-smokers, Brian is a lawyer, and Gemma is a customer service manager.
The Fishers should consider taking out a ‘joint life, first death’ term insurance policy. This means that in the event that one of them of dies during the 25-year period of their mortgage term, the surviving spouse will receive a one-off payment to cover the mortgage. The value of the policy will also mirror the mortgage by decreasing each year. The Fishers should look for a policy where the premiums are guaranteed so they don’t increase, and the premium is likely to be in the region of £30 per month.
Whole of Life Cover
Max Fox is 48. He’s a sales executive, a non-smoker and has one daughter, and he’d like to provide a legacy of £250,000 for her when he’s gone. In his case, he should consider taking out an index-linked whole of life policy. The premiums will increase in line with the Retail Price Index and he will also need to consider some Inheritance Tax planning to ensure his legacy is tax-efficient.
This policy costs in the region of £350 per month. This would equate to Max paying £155,400 in premium until his life expectancy of 83 years of age. His breakeven in terms of premiums paid versus sum assured is 108 years of age.
Completing Your Financial Plan
With careful consideration of your circumstances and thorough research of your options by your financial advisor, it’s possible to ensure that your financial plan is secure and that you and your loved ones are financially safe.
If you’d like to learn more, I’m hosting an evening event in the City of London on Tuesday 9 July 2019 from 18:30. Register your attendance here: Financial Wellbeing and Protection for Entrepreneurs. I hope to see you there!
Read the follow-up to the blog post in our next post, which covers critical illness and income protection insurance!