Is Life Insurance a Scam? A Straightforward Look at the Facts

It’s a question that gets asked more often than you might think: is life insurance a scam? In a world where we’re rightly cautious about where our money goes, it’s a fair question to ask. You pay a monthly premium for something you hope you’ll never need, so it’s understandable to wonder about its actual value.

The short answer is that when you deal with a regulated company, life insurance is not a scam. It’s a financial product designed to do a specific job: to pay out a cash lump sum if you pass away during the policy’s term. However, the feeling that it might be a “scam” often comes from misconceptions about how it works, who it’s for, and whether insurers actually pay out.

This article cuts through the noise. We’ll tackle the most common myths about life insurance head-on, using facts and figures to give you a clearer picture. The aim is to help you understand the product so you can decide for yourself if it’s a suitable option for your circumstances.

Myth 1: “Insurers take your money and never pay out.”

This is probably the biggest misconception and the primary reason people may feel cautious. The belief is that insurers will use any excuse to avoid paying a claim, leaving families with nothing. The reality, however, is quite different.

The Facts:

The vast majority of life insurance claims are paid. In 2023, the UK insurance industry paid out on 96.7% of all individual life insurance claims, representing £3,922 million in support to families.*
While a very small percentage of claims are declined, this is not usually down to insurers trying to avoid their obligations. The most common reasons for a claim being rejected are:

Non-disclosure: This is when inaccurate information was given on the application form, for example, about health or lifestyle factors like smoking or drinking habits.
Fraud: This is very rare, but it involves deliberately attempting to deceive an insurer.

When you are open and honest during the application process, you can have confidence that the policy is designed to do what it says it will. Insurers in the UK are also regulated by the Financial Conduct Authority (FCA), which sets strict rules on how firms must treat their customers fairly.

Myth 2: “It costs a fortune, I can’t afford it.”

Many people overestimate the cost of life insurance. The idea of another monthly outgoing can be off-putting, but the premium you pay is based on a number of individual factors.

How Premiums Are Calculated:

The cost of your life insurance premium can be influenced by:

Your age: Generally, the younger you are when you take out a policy, the lower the premiums can be.
Your health: Insurers will ask about your medical history.
Your lifestyle: Factors like whether you smoke or have a high-risk hobby can affect the price.
The cover amount: The larger the potential payout, the higher the premium.
The policy term: How long you want the cover to last.

For many, the monthly cost for a significant amount of financial protection can be less than a few takeaway coffees or a streaming subscription. It’s about weighing up the cost against the potential benefit of providing a financial safety net for your loved ones.

Myth 3: “Life insurance is too complicated to understand.”

The world of insurance can seem full of jargon, but the core concept of term life insurance, the type Tom offers, is straightforward.

Term Life Insurance Explained Simply:

You choose your cover amount: This is the cash lump sum that would be paid out. You might want to consider an amount that could help clear a mortgage, cover future living costs, or handle funeral expenses.
You choose your term: This is the length of time you want the cover to be active, for example, until your children are financially independent or your mortgage is paid off.
You pay a fixed monthly premium: With our Level Term policies, the premium amount stays the same throughout the term, so there are no surprises.
The policy pays out if you pass away during the term: If the worst should happen while the policy is active, the insurer can pay the cover amount to your chosen beneficiaries. If you outlive the term, the cover ends, and you don’t get any money back.

At Tom, our aim is to help make the process as clear as possible, from getting a quote to understanding the policy documents you receive.

Myth 4: “I’m young and healthy, so I don’t need it yet.”

It’s easy to think that life insurance is something to consider later in life. However, taking out a policy when you are young and in good health can have two potential benefits.

First, as mentioned earlier, it can often mean your premiums will be lower than if you waited until you were older.

Second, life’s unpredictability is one of the reasons financial protection products like life insurance exist. Many people choose to get cover when they take on significant financial responsibilities, such as getting a mortgage or starting a family, regardless of their age. The aim isn’t to dwell on the worst-case scenario, but to put a plan in place to help secure your family’s financial future if it were to happen.

Myth 5: “My ‘death in service’ benefit from work is enough.”

Having a death in service benefit through your employer is a great workplace perk. However, it may not be a complete substitute for a personal life insurance policy.

Key Differences to Consider:

It’s tied to your job: If you leave your job, you typically lose the cover. This could leave you needing to find a new policy when you are older, which could be more expensive.
The payout can be limited: Death in service benefits are often calculated as a multiple of your salary (e.g., four times your annual salary). You might want to consider if this would be enough to cover a mortgage and other family living costs over the long term.
You don’t control it: The policy is owned by your employer, who can change the terms or even remove the benefit.

A personal life insurance policy is independent of your employment. You own it, you choose the cover amount, and it stays with you as long as you pay the premiums, no matter how many times you change jobs. For some, having both can be a way to create a more comprehensive financial safety net.

So, What’s the Verdict?

Regulated life insurance is a form of financial protection designed to provide a sum of money to your loved ones at a difficult time. The industry pays out the vast majority of claims, and regulation by the FCA is in place to help ensure customers are treated fairly.

The decision of whether it’s right for you comes down to your personal circumstances. It can be worth taking a moment to consider how your family would manage financially without you. If you have people who depend on you, a life insurance policy could be a practical way to help protect their future.

TL;DR: Is Life Insurance a Scam?

No. When purchased from a regulated UK company, life insurance is a legitimate financial product.
Payouts are reliable. Insurers pay out on the vast majority of claims (96.9% in 2023)*. Claims are typically only denied in rare cases of non-disclosure or fraud.
Cost varies. The price depends on your age, health, and the amount of cover you need. For many, it can be a manageable monthly cost.
It’s not as complex as you might think. Term life insurance is a straightforward concept: you pay a premium for a set term, and if you pass away during that time, it’s designed to pay out a lump sum.
‘Death in service’ may not be enough. It’s a valuable benefit, but it’s tied to your job and the cover amount might be limited. A personal policy gives you more control.

Next Steps

Understanding the facts about life insurance is a key step. If you’re considering how you could help protect your family’s financial future, we can help.

Learn More

Reference:
* The Association of British Insurers (ABI) published these statistics in their “Protection insurers pay out record £7.34 billion to support individuals and families” press release, 29 May 2024. Full details can be found on the ABI website: https://www.abi.org.uk/news/news-articles/2024/9/protection-insurers-pay-out-record-7.34-billion-to-support-individuals-and-families/