What makes a good life insurance policy?

This week, Fairer Finance launched its life insurance ratings. Like all our tables, the aim is to give consumers an idea of which companies are doing the best job by their customers, and which ones have some work to do. But life insurance is quite different to bank accounts, car insurance and the other products we look at, so we've had to take a different approach to how we compile our scores.

We've dispensed with the customer polling part of our analysis, because when it comes to life insurance, the policyholder isn't around to tell you whether they had a good claims experience. And finding a statistically significant sample of relatives who have claimed is very difficult to do.

Who pays the most claims

Instead, we have aggregated life insurer's claims statistics - asking each insurer to tell us what percentage of claims they have paid out over the past three years. These are statistics that most have been publishing for a few years - but they haven't yet been aggregated into a comparison table. So that's what we've done.

On average, life insurers pay out around 98% of claims. But some insurers pay out as few as 94%. By publishing comparative statistics, we hope to put some pressure on the industry to edge ever closer to 100%. Some companies - such as NFU mutual - have already achieved that. The most common reason that claims are turned down is because customers failed to answer all the health questions truthfully when they made their application.

You may think that's not the insurer's fault - but insurers have a responsibility to design their questionnaires and engagements with customers in such a way that they eliminate the chance of people giving the wrong information. When a claim is rejected, it is heartbreaking for an already grief stricken family. But with insurers selling more and more policies online at arms length, the likelihood of people giving incorrect answers - intentionally or otherwise - is increasing.

Complaints and transparency

The percentage of claims paid is not the be all and end all. There are problems with it as a measure - in that smaller insurers who have fewer claims can end up with much worse results by turning down a small number of claims. Nevertheless, we believe that insurers need to be working towards 100%, and by publishing the data, there's nowhere for insurers to hide.

As with other product areas, we also look at insurers' complaints records at the Financial Ombudsman Service, and finally, we carry out our transparency analysis.

Life insurance suffers from the same problems with lengthy, complex terms and conditions as other financial products. There is no one who has produced a document written in what we consider to be plain english. Our transparency analysis also looks at how clear insurers are at disclosing the details of certain elements of life insurance policies - such as waiver of premium or the detail behind decreasing life insurance. Again, there's quite a lot of variability in insurance companies' performance.

As with all our ratings, there's no guarantee that buying a policy from our top rated companies will give you a great experience. But if you're faced with two insurers that are offering similar prices, we believe that picking one of top rated policies will at least mean you are rewarding a company that has a better record on claims, complaints and transparency than its competitors. And that should put pressure on the others to do better.

We'll be reviewing our methodology as we go - and working with companies to get even better data. Do let us know what you think.