Most low earners do not regard life insurance as essential, according to research by the Social Market Foundation (SMF) which also urged the Financial Conduct Authority (FCA) to investigate the UK’s “poverty premium”.
The body warned higher premiums risked leaving the most vulnerable people least protected, while there was criticism for a market that only worked for the heathy and the wealthy.
The research of 1,537 low income households found just 23% of those surveyed had life insurance.
This compared with 55% who had car insurance, 50% contents insurance, 40% buildings insurance and 20% who had taken out cover for a single item such as white goods or their mobile phone.
It also showed that just 23% of those surveyed viewed life insurance as essential, compared to 80% for car insurance and 60% for buildings and contents insurance.
Furthermore, the report found insurance was becoming increasingly unaffordable for those on low incomes as they are charged “a poverty premium” – meaning they pay more for insurance cover due to reasons they cannot control, such as where they can afford to live.
The bodies warned that additional costs that make insurance more expensive have a knock-on effect on insurance take-up, which is already low among lower-income families and can leave people unprotected against life events that could push them to the edge.
The SMF estimated that five million people in poverty would find it impossible to pay for an unexpected cost of £500 without outside assistance and over the next five years, an estimated two million people in poverty could have to face an insurable loss.
Consequently, the report’s authors are calling on the FCA to build on its existing work, and undertake new work where needed, to provide better information on the poverty premium in insurance. This should identify and publish, annually:
- The overall level of the poverty premium for different policy types and different groups in society;
- The portion of this that can be attributed to problems in the market, and the portion that would need to be tackled through social policy interventions;
- The impact on the poverty premium of issues such as monthly payment arrangements and the extent to which current charges are cost reflective.
The SMF adds the FCA should then publish a yearly review of its findings.
The research was conducted by Public First among households supported by Fair By Design with equivalised low income below 60% of median, on behalf of the Social Market Foundation.
It found people on low incomes can pay £300 more on car insurance than better-off drivers simply because of their postcode. People in poverty also pay more for their insurance cover because they can’t afford to pay for it all in one go.
Additional charges for paying for car insurance monthly instead of annually could mean an extra £160.
The research also found that just 7% of people believe that it is fair that those on lower incomes pay more for their insurance, and the majority (66%) believe that it is unfair.
James Kirkup, director of the Social Market Foundation, said: “Insurance is rightly seen as an essential good, something that everyone should have to protect them from unexpected losses. Yet the insurance market is operating in a way that means too many people in poverty either can’t afford that product, or face unexplained higher costs when they do buy it.
“People going without insurance reflects both the cost of living crisis and the way the insurance market works for people in poverty. We need politicians and regulators to work with the insurance industry to investigate the causes of the poverty premium so that everyone can get this vital product at a reasonable price.
“The insurance industry is providing an important product that supports the finances and peace of mind of millions of households. We hope the sector will rise to the challenge of addressing the poverty premium to ensure even more people can benefit from insurance.”
Martin Coppack, director of Fair By Design, said: “What’s clear from this research study is that people are not happy about being charged more for things that are outside of their control.
“Insurance helps us weather all kinds of financial storms. We all want to feel like we have a safety net.
“But we have two types of markets. One that works for the heathy and the wealthy, and one that penalises people for being poor.
“Sometimes we have to have insurance, like motor insurance, which is a legal requirement. For motor insurance, you can pay hundreds of pounds more simply because of where you can afford to live – no matter your claims history.
“What’s more, if you can’t afford to pay your insurance all in one go, you can end up paying well over another hundred pounds.
“The government says this is a job for the financial regulator to consider, while the regulator says this is something the government should sort out. We are stuck in a continual policy ping pong, while those on the very lowest incomes continue to pay more for being poor.
“This is why we are calling on the regulator to investigate the poverty premium in the insurance market to put an end to this stalemate.”
Matt Saker, president at the Institute and Faculty of Actuaries, added: “The SMF’s in-depth research makes an important contribution to developing a greater understanding of the poverty premium. We support its recommendations which build on our 2021 joint report with Fair By Design on The hidden risks of being poor: the poverty premium in insurance.
“The SMF analysis on the drivers of the poverty premium will be helpful in identifying appropriate policy interventions and which government departments, regulators or organisations could be responsible for driving policy change.
“Any assessment of potential interventions should be made through engagement with consumer groups and insurers to gain insight on the merits of differing interventions and to reduce the risk of unintended consequences for vulnerable customers. This is especially important in the current economic climate when more customers are facing cost of living challenges.
“We welcome the SMF’s suggestion that the FCA investigates the scale of the poverty premium in differing insurance markets. Another important area for the FCA to consider will be a market review of single product cover which many lower income families rely on.
“These products are used to insure items such as smart phones, computers or white goods, but there could be cases where a standard contents insurance policy may provide a cheaper option.”