Is my life insurance protected if the insurer fails?

Life insurance is one of the most strongly protected financial products a consumer can hold. If a UK-authorised insurer fails, the Financial Services Compensation Scheme (FSCS) covers long-term insurance, which includes life assurance, at 100% of the value of any valid claim¹. There is no cap eating into the payout: the full amount of a valid claim is protected, however large or small.

The FSCS is the UK's statutory compensation scheme, set up by parliament and funded by a levy on the financial services industry, not by the taxpayer³. It steps in when a financial services provider fails and cannot pay back money it owes⁴. Its protection covers a range of products including deposits, insurance, investments, pensions and mortgage advice¹, but the level of cover varies sharply between them, and life insurance sits at the top of that range.

Life insurance is covered at 100% with no upper limit

The FSCS sorts insurance into two broad families, and the difference matters enormously for anyone holding a protection policy. Long-term insurance, which includes life assurance, is protected at 100% of the claim². General insurance, the short-term annual cover people buy for their car, home or pet, is protected at 90%². The Bank of England gives a plain example of the contrast:

Bank of England explainer on the FSCS³

Whole of life assurance claims are paid at 100%⁹, as are claims arising from the death or incapacity of a policyholder due to injury, sickness or infirmity, where the firm failed on or after 3 July 2015¹⁰. Before that date, those death and incapacity claims were paid at 90%¹⁰. So a term life policy, a whole of life policy and a family income benefit policy all fall on the 100% side of the line, because they are long-term insurance contracts.

The "no upper limit" part is what separates life insurance from almost everything else the FSCS covers. A savings account is protected up to £120,000 per person, per firm¹¹, and an investment claim up to £85,000⁶. A life insurance claim has no ceiling at all: the FSCS pays either 90% or 100% of the claim value where policyholders have valid claims under a policy with a failed insurer, and for life cover that means 100%⁹. Annuities and pension savings provided under a life insurance contract are also paid in full¹¹.

This is worth knowing when choosing between cover types. The protection applies to the policy itself, whether it is term life insurance, whole of life insurance or an over 50s plan. What the FSCS does not do is guarantee the policy's value in the way it guarantees a deposit: it guarantees that a valid claim gets paid if the insurer cannot pay it. For more on how these policies differ, see how life insurance works.

What happens to your policy if your life insurer fails

An insurer "fails" in FSCS terms when it is in default: it cannot pay claims made against it, or is likely to be unable to do so¹². In practice this typically happens when the firm is placed into an insolvency process such as administration or liquidation³. At that point the FSCS takes over the job of protecting policyholders, and its first move is not to write cheques but to keep cover alive.

The FSCS states its approach plainly: "If it's your insurance company that has failed, we'll try to get seamless cover with another insurer. If that's not possible we'll look to arrange the return of the remaining premium"¹³. Where possible, policyholders are either refunded the remaining portion of their policy premium, subject to the rules, or the FSCS arranges a replacement policy with another insurance provider on their behalf¹⁴.

Two practical points follow from this. First, ongoing claims are not handled by the FSCS itself: the insurer will likely appoint a separate run-off agent, also known as a claims handling agent, to manage claims from end to end¹⁴. So if a claim is already in progress when the insurer fails, it usually continues through that route rather than starting again. Second, if the policy is in your name but was paid for via a loan from a finance company that required you to assign your rights to it, the FSCS will pay any return of premium to that finance company, not to you⁹.

The level of protection also depends on when the firm failed. Claims arising from the death or incapacity of a policyholder due to injury, sickness or infirmity are protected at 100% where the firm failed on or after 3 July 2015, and at 90% where it failed before that date¹⁴. Life assurance falls under long-term insurance, which is protected at 100%, so a policy that pays out on death is among the most fully covered products the FSCS handles.

When the FSCS will not protect you

The 100% protection for life insurance is broad, but it is not unconditional, and the boundaries are worth knowing before you rely on them.

The clearest boundary is authorisation. The FSCS only covers financial services firms authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) to do business in the UK¹¹. If the insurer was never authorised, the FSCS cannot help, however genuine the policy looks. There are also types of insurance that are excluded altogether: goods in transit, marine, aviation, credit insurance, and contracts of reinsurance for insurance firms or brokers and financial advisers are not eligible for FSCS protection⁹.

Dates matter too. For claims relating to insurance intermediaries, the FSCS can only help if the claim relates to business conducted on or after 14 January 2005¹². For investment claims the cut-off is 28 August 1988, and for mortgage advice and arranging it is 31 October 2004¹². Firms that were insolvent or declared in default before the FSCS became operational on 1 December 2001 fall outside the scheme¹⁷.

Who is claiming matters as well. Large businesses are usually excluded, although there are some exceptions for deposits and insurance¹². For general insurance other than the compulsory element, small companies must have an annual turnover of less than £1m to be eligible¹¹. And the FSCS does not pay compensation simply because an investment performed worse than hoped¹¹: it compensates for failure of a firm or bad advice, not for market outcomes.

Pensions and investment-linked policies: where limits apply

Life insurance itself is unlimited, but products that mix insurance with investing or pensions are not, and the limits depend on which part of the arrangement failed.

Pension protection varies depending on the type of pension product, and there are limits to the amount the FSCS can compensate¹⁸. Where a pension qualifies as a contract of long-term insurance, the FSCS covers it at 100% with no upper cap¹⁹, and annuity income provided under a life insurance contract is paid in full¹¹. But claims against bad advice about a pension are capped: the FSCS applies an £85,000 compensation limit for pension advice⁵. If you were recommended an unregulated product by an adviser and held it in a self-invested personal pension (Sipp), you might be covered for up to £85,000⁶.

Investment claims have their own scale of limits, set by when the firm failed²⁰:

The limit is per firm, not per claim. The FSCS's own rules give the example of a claimant with a protected investment business claim of £70,000 and a further such claim of £20,000 against the same firm: they receive only the £85,000 limit²¹.

Two further boundaries are worth flagging. The FSCS's protection does not include defined benefit (DB) pension schemes themselves, which are protected by the Pension Protection Fund²². And where the loss arises from bad advice rather than from a product provider failing, the claim is against the firm that gave the advice, with the advice limits above applying. The FSCS is restricted to covering losses arising from bad advice, not from a platform failing⁶.

Check your insurer is authorised before you buy

Because protection depends entirely on authorisation, the FSCS is blunt about the right time to check: it is really important to know how much of your money the FSCS can protect before you sign up to anything²³. The check itself takes minutes and costs nothing.

The FSCS sets out the steps. First, check your provider is authorised by the FCA²⁴. Second, find out whether the particular activity the firm is carrying out for you is regulated by the PRA or the FCA, because FSCS protection applies only where it is²⁴. For insurance specifically, the FSCS can only protect you if the PRA has authorised your insurance provider¹⁰.

The practical route is the FCA's Financial Services Register, searchable by the provider's name: if the status shows "authorised", the FSCS may compensate if the firm fails¹⁰. The FSCS's own protection checker is based on that same register, which you can search yourself²⁶. The FSCS also warns that its checker is the place to verify protection, because appearances can deceive¹⁵.

This check matters most when buying cover from a name you do not recognise, or through an intermediary. The FSCS suggests asking an adviser directly: are you an FCA authorised financial adviser, does the FSCS protect the advice you give, how much is protected, and what would happen if the firm failed²³? Any adviser worth using will answer those questions plainly.

Claiming from the FSCS: free, and often automatic

For many customers there is nothing to claim. For deposits, protection applies automatically: customers do not need to do anything, and the FSCS will compensate them automatically¹⁵. Where a claim is needed, the FSCS is a completely independent and free service¹⁷, and it is completely free to claim⁷. Claiming directly with the FSCS costs nothing, so no part of any compensation owed is taken in fees.

That last point answers a question people often ask about claims management companies. Whether you take your claim to a claims management company or come straight to the FSCS, you have to provide the same information²⁷. The difference is that a middleman may charge for the privilege.

If you do need to claim, the process is:

1. Get your documents together. Many will be available from your product provider, which is obliged to release them to you¹⁷.
2. Check if you can claim, using the FSCS's online tools².
3. Create an online account².
4. Complete the claim application. This takes between one and two hours, and you can save your progress and return at any point¹⁷.
5. Keep an eye on your claim through the online service².

For all other claims not handled automatically, you use the FSCS's online claims service, and it will tell you straight away if you are eligible¹³. Timescales vary: most FSCS claims take between five months and one year⁸. Straightforward insurance claims have been reported to take around three months, though often longer². If the firm or product is a situation the FSCS has not dealt with before, the claim can be held for at least six months while it investigates²⁸.

The FSCS can be reached on 0800 678 1100, by post at Financial Services Compensation Scheme, PO Box 300, Mitcheldean, GL17 1DY, or through the contact form on its website².

Mis-sold policies and failed advisers

A separate kind of protection covers the situation where the problem is not the insurer failing but the advice being wrong. If you were mis-sold an insurance policy and lost money, and the firm that sold it has failed, the FSCS may compensate you¹¹. The same applies if you were the victim of fraud where the broker has gone out of business and cannot return premiums or money owed¹¹.

The level of protection depends on what was mis-sold. Compulsory general insurance bought via a failed broker or financial adviser is 100% protected; all other general insurance bought that way is 90% protected¹⁰. For advice claims the important principle is which firm you claim against: you claim against the firm that advised you to take out the policy, not the firm you had the policy with²⁹.

The same logic runs through the FSCS's other advice cover. If a regulated adviser fails and you lost money because they recommended a mortgage that was not right for you, you could claim compensation³⁰. For PPI, if the information you were given was misleading or insufficient and the advising firm has failed, you may be eligible, though only if the advice was received on or after 14 January 2005²⁹. The 29 August 2019 PPI deadline does not apply to FSCS claims, because that deadline covered claims against companies still trading²⁹.

Where the firm is still trading, the route is different: complain to the firm first, then to the Financial Ombudsman Service. The ombudsman's approach can be seen in its case studies, such as an upheld complaint about a non-advised sale of a single-premium PPI policy alongside a ten-year unsecured loan in 2006³¹.

One limit on all of this: in most situations the FSCS cannot compensate people for money lost due to scams or fraud, except where bad advice came from an authorised financial adviser to invest in something that turns out to be a scam³². Fraud itself is a matter for the police and your bank, not the compensation scheme.

Spotting scams that use the FSCS name

The strength of FSCS protection has made its name a target. The FSCS warns that scammers can use the name of a legitimate firm and sometimes the FSCS logo to try to get people to part with their money¹⁵. It has issued cease-and-desist letters to scammers who use its logo or fake its protection³³, and it has been reporting at least one phishing attempt and one fake investment website per day³³.

The scams take several forms. The FSCS is aware of fraudsters targeting consumers by email, claiming to represent the FSCS and asking them to share personal data³⁴. On the phone, caller ID can be faked: the FSCS says it is possible for a scammer to use a fake caller ID to make it look as though they are calling from the FSCS, and it has seen a rise in this sort of scam³².

The defence is the same check that protects you before buying: verify the firm on the FCA register¹⁰, and verify protection claims through the FSCS's own checker¹⁵. If an investment or policy is offered with FSCS protection as the main selling point, treat that as a reason to slow down, not a reason to proceed. Our guide to scams and fraud covers the wider warning signs.