A question about insurance I probably hear most often is whether or not it is a scam. And there is only one answer to that - NO!
I do not claim everything is always straightforward, as sometimes it is not, but the fault for that is mostly on the side of individuals within the insurance industry who get a bit too greedy. And yes, I used the term insurance industry on purpose, as it is just that - an industry, made to make a profit.
How Life Insurance Started
I have previously already written about the history of life insurance, so I will not go into too many details. The first arrangement that was similar to what is known today as life insurance can be found as far back as 1750 BC, with King Hammurabi. It was not real life insurance per se, but it was very similar. The same goes for ancient Romans and the Greeks, that lived around 600-100 BC. They offered protection to the families of the fallen soldiers. Roman military general Gaius Marius came up with the concept of the so-called burial club.
It took us more than 1500 years before this concept was fully developed and the first life insurance policy was written. It happened in Edwards Lloyd’s Coffee House in London in the year 1688. This coffee house became what we know today as Lloyd’s of London, which is of the biggest insurance companies in the world.
But why am I talking about history? To prove that the life protection component has stood the test of time and cannot be accused of being a scam. Anybody with some essential knowledge about finances sees insurance as an exceptionally valuable monetary tool. By having insurance, you can generally live freely, without stressing over those crisis expenses that you might otherwise find difficult to sort out.
What About Life Insurance Today?
Today, the insurance industry is one of the most regulated and secure industries in the world, and as such, it is very safe, but that does not mean it is 100% safe. One of the most common irregularities that happen within it are churning or twisting. This is also a topic I have already written about, and you can find it in an article here.
Why do People Still Think Life Insurance is a Scam?
I honestly don’t know; I can only share some of the most common reasons I hear from people and explain where they might be coming from.
Insurance companies don’t pay out claims
If you google a bit about insurance, this will pop up often. The truth is that more than 99% of all life insurance claims are paid. And what is the reason for this number not being 100%? Lies! However, not from the insurers but from policyholders. You always need to tell the truth! Do you smoke? Tell them! Are you an adrenaline junkie? Don’t lie! Allow me to promise you that the insurance agencies attempt their absolute best to not spend a single penny on any fake or superfluous case. So be honest, and you will be OK!
That is the beauty of life insurance. If you only received what you paid with premiums, it wouldn’t make any sense to risk it. And yes, life insurance is a form of risk management (not all types of insurance are, for example, whole-of-life insurance), not just for you but for the insurance companies as well. So how come the insurance companies can offer such high payouts and still earn money while doing it? Well, they invest your premiums. It is all about leverage created by our premiums. Pennies today create pounds later. I could also say that the law of large numbers comes into effect.
You can’t put a price on one's life
That is absolutely true! You can’t put a price on one's life, but that is not what insurance companies are trying to do with life insurance. They just assess the risks and possibilities. At the beginning of the life insurance industry, lots of insurance providers went broke or couldn’t offer realistic terms as they didn’t know how to calculate the risks involved in life insurance. All that changed in 1693 when the well-known English astronomer, Edmond Halley, analysed the birth and death archives of the town of Breslau. This led to the emergence of the first mortality table, something that is still used today in the insurance industry. It is a base for what the insurance companies use to calculate risks, and it helps them offer the best terms for them and for you. Mr Halley called it the life table, but today, we use the term mortality table.
Fun fact:
Edmond Halley has the most famous comet named after him. Ever heard of Halley’s comet? I’m sure you have!
Is life insurance a scam? It isn’t. However, I will admit that there are certain kinds of insurance that are ripoffs and only bring profit for the agent. That’s why it is vital to learn about the various sorts before getting out any cash.
What if the insurance provider goes broke before I make a claim?
A lot can change in 20 or 30 years, and sure, your insurance provider may go bankrupt during this time, merge with another company, or you could even see something else unexpected happen in this fairly long period of time. But what happens to your policy if anything like this happens?
Don’t worry! You and your life insurance policy are protected!
Yes, even insurance companies have insurance. It might sound funny, but it is essential. The government established what we know as the Financial Services Compensation Scheme, also known as FSCS, exactly for cases like that. The FSCS is the UK's statutory deposit coverage and buyers’ reimbursement scheme for clients of authorised monetary offerings firms. This means that the FSCS will pay you a reimbursement if a company is unable to pay out your claim. The FSCS is an operationally impartial body, created as part of the Financial Services and Markets Act 2000 (FSMA) and funded through a levy on authorised monetary offerings firms. The scheme guidelines of the FSCS are made through the Financial Conduct Authority (FCA) and are contained within the FCA's Handbook. The FCA additionally rents its Board, and the FSCS is responsible to the FCA. The scheme covers deposits, insurance policies, coverage brokering, investments, mortgages and loan arrangements. Since 2001, the FSCS has already helped almost 5 million people and paid out more than £26 billion.
The only downside is that they only protect up to £85,000 of your investment. But like I have mentioned before, the insurance industry is one of the most regulated and protected industries out there, so the chances of you losing your money are slim!