There is no point in having insurance that won’t pay out in the event you make a claim. That would be a complete waste of money on premiums paid and potentially disastrous for your financial situation when you needed the money you thought you were covered for. Can this actually happen? It can and does.

When you get insurance you are legally obliged to be honest about your past. If they ask, you must tell a car insurer about that time you lost your licence and past claims you have made. A travel insurance company will want to know where you intend to travel to and, again, if you have made a previous claim.

Life insurers need to know about your medical history in a process called underwriting. Before they will give you life insurance, an insurer will usually ask about your medical history and that of your family. They need to know if you are a smoker, how old you are and your sex. They should also ask if you play contact sports or like to do a bit of skydiving on the weekends. Once they have all your information they will do one of three things: 1) offer you cover with a base premium; 2) offer you cover with a loading attached to the base premium; or 3) refuse to cover you.

The underwriting process can take some time as the insurance company looks into your medical history and may ask you to provide evidence of examinations you’ve had. These companies really are very comprehensive as it’s in their interests to not provide cover to customers who pose the biggest risks to their profits. However, some life insurance companies don’t do their research when you sign up with them.

In recent years daytime television has been showing advertising for income protection and life insurance with very affordable premiums, almost too affordable. Compared to life and income protection insurance premiums sold through financial planners, the offer sounds too good to be true. Well, if it sounds too good to be true, it probably is.

The daytime advertisers don’t have the same attention to detail when it comes to their underwriting as their more expensive cousins. They tend to have a significantly lower bar and therefore allow a greater number of high risk customers to purchase a policy. But when the customer comes to make a claim, the claims department then goes through the policy holder’s background to find a reason not to pay up. The percentage of claims that are knocked back by these companies is around 50%, which is so low it makes you wonder why anyone would sign up with them in the first place.

Until legislation catches up with these cheap life insurance companies, you would undoubtedly be better off seeking a policy with a reputable organisation. Because when you need to make a claim against life or income protection insurance, you really need to get that money.

If you watch daytime commercial TV you can’t miss the large number of ads for funeral insurance. If you believe them, you can pay as little as $3.50 a week for $6,000 of cover that’s paid out to your family within a couple of days of you dying. With figures like these, the average customer would have to be paying premiums for 33 years before they’d paid for their funeral in yearly premiums. And that assumes the insurance company isn’t incurring any costs or making a profit, and getting craploads of advertising on the telly for free. Unlike life insurance products, cover is guaranteed and you don’t need a medical examination (the average life insurance company won’t go anywhere near you if you’ve been diagnosed with a life-threatening disease for fear they’ll lose too much money). And if this wasn’t sweet enough, their customers who are older than 90 get their cover without even paying more premiums.

In a lot of ways these ads are like the ones that were on years ago for high interest (and high risk) mortgage backed securities. Their offers sounded too good to be true, and the companies went bust.

So, do you want funeral insurance, or do you want to pay funeral insurance premiums for a few years, then get a letter one day telling you your policy is worthless as the company has gone belly up?