Questions To Be Asked
To get the best from life insurance you must have a good idea of what you want. The best way of deciding this is to ask yourself two simple questions:
1. How much protection do you need, against what eventualities and over what period?
2. How much do you want (and how much can you afford) to save, over what period and for what purpose?
The answers will determine the type of policy in which you should be interested.
Even assuming you have clear-cut answers to these questions (we shall follow through some examples later) there remains another important problem - whom do you go to for specific advice on which policies to buy?
As was explained in Section N2, there is a wide range of outlets for life insurance in the UK as a result of various historical patterns in the development of the industry. It is worth taking a brief look at the attitudes and abilities of the various groups which offer advice to the public.
It must be remembered that all these groups are paid for their advice. Just because the payment is made by the life insurance company as a commission does not mean that it does not cost you anything.
On the contrary, it is always you, the policyholder, who pays for the advice because the life insurance company allows for the cost of the commission in determining the premiums you pay to it. The majority of life insurance companies are members of the Life Offices Association (LOA) (in England) and the Association of Scottish Life Offices (ASLO) (in Scotland). These companies pay agreed common rates of commission on the policies they sell, though some of their smaller members are permitted to pay slightly higher rates.
The rate of commission varies with the type of policy, but generally the longer the premium paying term, the higher the commission. Companies that are not members of one of these groups are not bound by the common commission agreement and sometimes pay substantially higher rates. Some companies pay no commission at all, relying on advertising in the main. It is therefore always worth asking, when recommended to purchase a policy, why the adviser is recommending it and ensuring that there are good grounds for the choice of company and of policy. Table 2N illustrates some typical levels of commission.
In recent years some insurance broking firms have formed very close links with particular insurance companies, and in some cases the same people who head an insurance broking firm have also participated in the management of a life insurance company.
The reason for this is that such insurance brokers believe that their contact with the public has given them special abilities to design policies that will sell well. However, there are dangers for the public in this, since some firms of insurance brokers which employ their own salesmen may push the products of a particular company for reasons... see: Insurance Broking Relationships