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  • jamesd
    • #2
    • 3rd Apr 12, 10:35 PM
    • #2
    • 3rd Apr 12, 10:35 PM
    This doesn't change your main points, but it does decrease the value of the insurance a bit. You've used the wrong mortality statistics. Those are period statistics, you should have used cohort, which are available in spreadsheet form from ONS. The spreadsheet is less convenient for showing regional variations, though.

    For Beatrice her cohort life expectancy at 60 in 1997 was 82.4 years. At 75 in 2012 it's 88.1 years. Ignoring investment returns it would still on average make sense for her to continue paying in.

    In practice she can put the monthly premiums into an ISA and it'll probably grow by enough to make paying in the wrong choice on average. For it to be the optimal choice to pay in she'd need to be closer to 80 than 75.

    This leads to some somewhat reasonable general guidance:
    • If you're a woman aged 80 or over or a man aged 77 or over and in good health it's probably good to continue paying in.
    • If you're a woman aged 75 or younger or a man aged 72 or younger and in good health it's probably good to cancel.
    • Between those ages the difference isn't likely to be great, just use your personal preference.
    • If you're in Scotland or a very poor area, or did manual labour instead of office work, reduce those ages by three years for each.
    • If you're in a rich area or a professional like a doctor or solicitor, increase the ages by three years for each.
    • If you have heart trouble, smoke or are very overweight decrease the ages by three years for each.

    The education, regional and health factors are very crude but enough to give some idea of how things change and produce somewhat decent results, though a more detailed tool could definitely do better. At the extremes:

    Man in Scotland who was a labourer, has artery disease, smokes, drinks a lot and is obese, good to continue paying in from age 62.
    Woman professional in a rich area with no health trouble, good to continue paying in from age 86.

    You probably already know about the difference between period and cohort life expectancies so this is mainly a note for others that the true age to which at least 50% of people their age will live is likely to be a few years longer than shown.

    Given your liking for statistics you're probably itching to have a calculator that can work out the likely best choice for each person...
  • oldvicar
    • #3
    • 3rd Apr 12, 11:27 PM
    • #3
    • 3rd Apr 12, 11:27 PM
    you could pay more in, than is paid out
    the AVERAGE 65-year-old man will pay in more than they ever get out
    I am glad that you are warning against these nasty little policies, with high charges and frequently inadequate cover. But why the outrage at the facts qoted above?

    Surely this is normal for any type of sustainable insurance?
    {Payments in} = {Policy admin overheads} + {Insurance company profit} + {Payments out}.
    It is only to be expected that, on average, people will pay in more than is paid out.

    It's the same with e.g. my house insurance. I expect to keep paying in to cover my risks, but I would very much prefer never to have a payout. Its the same for the majority of buildings policyholders. Only the 'lucky' few have their house burn down and get paid out more than they put in.
  • MSE Martin
    • #4
    • 4th Apr 12, 1:28 PM
    • #4
    • 4th Apr 12, 1:28 PM
    This doesn't change your main points, but it does decrease the value of the insurance a bit. You've used the wrong mortality statistics. Those are period statistics, you should have used cohort, which are available in spreadsheet form from ONS. The spreadsheet is less convenient for showing regional variations, though.

    For Beatrice her cohort life expectancy at 60 in 1997 was 82.4 years. At 75 in 2012 it's 88.1 years. Ignoring investment returns it would still on average make sense for her to continue paying in.

    In practice she can put the monthly premiums into an ISA and it'll probably grow by enough to make paying in the wrong choice on average. For it to be the optimal choice to pay in she'd need to be closer to 80 than 75.

    This leads to some somewhat reasonable general guidance:
    • If you're a woman aged 80 or over or a man aged 77 or over and in good health it's probably good to continue paying in.
    • If you're a woman aged 75 or younger or a man aged 72 or younger and in good health it's probably good to cancel.
    • Between those ages the difference isn't likely to be great, just use your personal preference.
    • If you're in Scotland or a very poor area, or did manual labour instead of office work, reduce those ages by three years for each.
    • If you're in a rich area or a professional like a doctor or solicitor, increase the ages by three years for each.
    • If you have heart trouble, smoke or are very overweight decrease the ages by three years for each.
    The education, regional and health factors are very crude but enough to give some idea of how things change and produce somewhat decent results, though a more detailed tool could definitely do better. At the extremes:

    Man in Scotland who was a labourer, has artery disease, smokes, drinks a lot and is obese, good to continue paying in from age 62.
    Woman professional in a rich area with no health trouble, good to continue paying in from age 86.

    You probably already know about the difference between period and cohort life expectancies so this is mainly a note for others that the true age to which at least 50% of people their age will live is likely to be a few years longer than shown.

    Given your liking for statistics you're probably itching to have a calculator that can work out the likely best choice for each person...
    Originally posted by jamesd
    Interesting stuff - thank you
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.

    Don't miss out on urgent MoneySaving, get my weekly e-mail at www.moneysavingexpert.com/tips.

    Debt-Free Wannabee Official Nerd Club: (Honorary) Members number 000
  • MSE Martin
    • #5
    • 4th Apr 12, 1:30 PM
    • #5
    • 4th Apr 12, 1:30 PM
    I am glad that you are warning against these nasty little policies, with high charges and frequently inadequate cover. But why the outrage at the facts qoted above?

    Surely this is normal for any type of sustainable insurance?
    {Payments in} = {Policy admin overheads} + {Insurance company profit} + {Payments out}.
    It is only to be expected that, on average, people will pay in more than is paid out.

    It's the same with e.g. my house insurance. I expect to keep paying in to cover my risks, but I would very much prefer never to have a payout. Its the same for the majority of buildings policyholders. Only the 'lucky' few have their house burn down and get paid out more than they put in.
    Originally posted by oldvicar
    Except this isn't insurance its assurance - as death is assured. My problem here is the very poor return against a definite circumstance.

    In effect you're insuring against dieing earlier than average - and that's really how it needs to be portrayed, i simply dont think many people who get the policies perceive it as insurance and especially not insuring against early death.
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.

    Don't miss out on urgent MoneySaving, get my weekly e-mail at www.moneysavingexpert.com/tips.

    Debt-Free Wannabee Official Nerd Club: (Honorary) Members number 000
  • thelovelysamantha
    • #6
    • 4th Apr 12, 2:44 PM
    • #6
    • 4th Apr 12, 2:44 PM
    This is such a common matter of concern to we olds. I'm not a big fan either of insurance or assurance since by definition the provider exists to make money but neither do I want my eventual executor to have to take out a loan to cover the immediate expenses when I shuffle off. We have therefore opened a joint account; it's not that easy with a bank or building society if you don't share a name/address and don't want to have to keep shifting it to keep it from reverting to a punitively puny rate of interest, but there are possibilities such as holding investment trust shares within a joint account. Has anyone else tried this route? Obviously we can't hold ISA cash jointly, and our tax liabilities are different, so this keeps it about as simple as I think it can be as the shares pay a distribution of capital rather than a dividend. I can't imagine I'll live long enough for there to be any problem with capital gains, unless the HMRC rules/threshold change!
  • jamesd
    • #7
    • 4th Apr 12, 8:47 PM
    • #7
    • 4th Apr 12, 8:47 PM
    Check with your own bank for specifics but it's common practice for a bank to release funds from current or savings accounts in the form of a cheque to an undertaker when presented with a death certificate and invoice from the undertaker for anticipated funeral costs. NatWest is one bank where I have personal experience of doing this and it was a straightforward process that took about a week from start to undertaker receiving the cheque. An undertaker will normally just go ahead with the funeral without waiting for payment, the person doing the arranging would be expected to give a personal guarantee to pay.

    The advantage of this approach is that you can have your money sitting in an account and making you some money while you're still alive and yet still have it available very quickly to take care of funeral expenses. Since you need an emergency fund anyway, this can be doing dual duty as both your emergency fund while alive and funeral expenses when needed.

    For non-funeral expenses the joint account approach can be a good one, though do be aware that it will create a financial association between the credit records of each joint holder and that may be undesirable in credit reports.

    If you want to make life easier for the person handling the immediate things:

    1. Write down your funeral preferences.
    2. Write down a list of people you want to be told and invited, and say if there are any you don't want invited.
    3. Write down a list of your accounts and contact information for them all.
    4. Ensure that any executor named in your will is really willing to be your executor. If they refuse things can get very messy.
  • oldvicar
    • #8
    • 5th Apr 12, 12:38 AM
    • #8
    • 5th Apr 12, 12:38 AM
    Except this isn't insurance its assurance - as death is assured. My problem here is the very poor return against a definite circumstance.

    In effect you're insuring against dieing earlier than average - and that's really how it needs to be portrayed, i simply dont think many people who get the policies perceive it as insurance and especially not insuring against early death.
    Originally posted by MSE Martin
    I see. Thanks for responding Martin.

    Possibly a 'fairer' way to sell such policies would be to make them 'paid up' after a time.

    For example just making up some figures to illustrate: for the promise of a payout of 1000 upon death, charge a premium of 10 a month, but after 15 years of premiums (1800 paid in) if the policyholder still survives stop collecting the premiums but stil pay out 1000 when death eventually occurs.

    Still a pretty pointless product for the majority of people. The main problem is they are (mis)sold mainly on the emotional benefit of 'caring for loved ones when you are gone' rather than any truly practical benefit.

    The majority of policies probably would count as mis-sales if the insurer was responsible for ensuring the product was suitable for a customers needs. But these are sold on the basis of 'guaranteed acceptance', no questions asked (i.e. no fact find).
  • thelawnet
    • #9
    • 5th Apr 12, 4:17 AM
    • #9
    • 5th Apr 12, 4:17 AM
    For Beatrice her cohort life expectancy at 60 in 1997 was 82.4 years. At 75 in 2012 it's 88.1 years. Ignoring investment returns it would still on average make sense for her to continue paying in.
    Originally posted by jamesd
    But that to me is the biggest problem with the article.

    You cannot ignore investment returns.

    To consider one of the examples in the article:

    'Big Bob is a 65-year-old darts player in pretty decent health. His kids are struggling and hes alone, so he decides to put a bit of cash aside each month in an over-50s plan, paying 5 a month with Axa. It promises to pay him out a guaranteed 660 when he dies provided he lives at least two years.'

    There are a few things that give an indication about Bob's life expectancy here.

    Big Bob - is he obese, or an alcoholic, or both?
    Darts player - likewise, does he spend a lot of time in the pub, or smoking?
    He's alone - this will reduce his life expectancy, for a number of reasons
    Kids struggling - not sure what this means, but he has some support here, probably increasing his life expectancy.

    Anyway, moving on, let's just say Bob is 'average', and can expect to live around 21 years.
    Regardless of the value of the final payout, the problem here is that the longer you pay in, the more significant inflation becomes.

    To simplify it, let's say there are annual payments of 100 at the beginning of each year, and you get back 1000, and inflation is 5% per year.

    If you live 2 years, you pay in 100 in today's money in year 1, 95 in today's money in year 2, therefore paying in 195 of net present value, and you get back 1000*.95*.95 = 902.50 We pay in a nominal 200 and get back a nominal 1000, but we paid in a real 195 - 97.5% of the nominal value, and got back a real 902.50, only 90.25% of the nominal value.

    What happens if you were to pay in for 10 years + then die? This is a geometric series, n=10, r=0.95, a=100, so the NPV of the payments is 802.56, while the NPV of the payout is only 598.74; this time the real value of the payments is 80.26% of the nominal, but the real value of the payout is just 59.87% of nominal.

    In other words, while they might quote higher payouts for younger people, by the expected date of death, these payouts will be ravaged by inflation, relative to the amount paid in - ALL of your payout will be in inflated, 2033 (expected date year death) pounds, whereas your payments in will be partly in expensive 2012 pounds, and only the very last payments will be depreciated to the extent of the ENTIRE payout.

    Taking the example from the article:

    1. Find out how long itll be before he pays in more than itll pay out
      Divide the payout by the monthly contribution:
      660 divided by 5 = 132.
      This gives the number of months after which he will have paid in an amount equal to his lump sum.
      132 months divided by 12 = 11 years.
      So, as Bob is currently 65, if he reaches the age of 76, he will have contributed more than the planned payout.
    This isn't right at all.

    Let's derive a better formula.

    Let (100% - monthly inflation) = r, the number of months premiums paid = n, the assured amount = m, and the monthly payment = a

    The NPV of the assured amount is m * r^n.
    The question is when does this equal the NPV of the sum of payments
    This sum is given by a * (1-r^n) / (1-r)
    So in general this becomes a good deal when m * r^n > a * (1-r^n)/(1-r)
    If annual inflation is 5%, r = 0.995926, we know m = 660, a = 5, so
    660 * 0.995926^n > 5/0.004074124 * (1- 0.995926^n)
    i.e. 660 * 0.995926^n>1227.258-1227.258* 0.995926^n
    or
    0.995926^n > 1227.258/1887.258
    i.e. n = log(1227.258/1887.258, 0.995926)
    = 105.46 months, or just short of 9 years

    Another point from the article
    Though its important to note that if you were to die during the first one or two years (which varies by policy) you would not get a payout.


    Not quite true.


    Per Axa,



    If you die in the first 2 years, wed pay back all the premiums paid, plus half as much again.


    A male aged 85 paying 74/month assures 4,055 on death. He has approximately a 22% chance of dying before 2 years, in which case he gets back all the premiums paid, plus 50%.


    Here are US mortality rates by age:


    http://www.ssa.gov/oact/STATS/table4c6.html


    (can't find UK ones)

    I plugged these into a spreadsheet and calculated the probability of death at any given age for someone age 85, and the NPV of payments and death benefit at that age.
    From this, I calculate the profit if you die during a given year.

    For example, if you live to be 105, you will receive the lump sum with NPV of 1381, but you will have paid premiums of 11,440. This gives a loss of NPV from dying at that age of 10,060.
    On the other hand, IF you die after 2 years (say 2.5 on average), your profit is 1389, based on having paid 2.5 years of premium and the NPV of the death benefit. Sum all the possible death years and you find the profit has an expected loss of 1612.50


    Take the example of a 65-year-old man whos been told hes only likely to live for another five years. On that basis, even an Axa plan for 74 a month would pay out 12,085 if you did die after five years youd only have paid in 4,400 to get it, a very efficient investment.
    So for someone whos very unlikely to make the average life expectancy, these can be a seriously good gamble.

    Well that really depends on the nature of what's limiting your life expectancy. If you look at the actuarial tables above, mortality risk for a 65-year-old in the next year is 1.7%. In order to have a life expectancy of 5 years, it's likely that your mortality risk in the next year is say 17%. But it might not be, and whether it's a good deal depends on these numbers. If for example the doctor says 'we expect you to live five years, but if you beat that, it's likely to be twenty', then when you combine the fact that you don't get the full payout until 2 years, and for someone with limited life expectancy, then there's presumably a substantial chance that they will die within 2 years, all but killing the payout, with the chance that if you return to health as a 70-year-old, you can very likely face another 20 years of life, it can add up to a poor deal.

    Bottom line of course is that these policies are almost always a bad deal.

    For it to be the optimal choice to pay in she'd need to be closer to 80 than 75.

    This leads to some somewhat reasonable general guidance:
    • If you're a woman aged 80 or over or a man aged 77 or over and in good health it's probably good to continue paying in.
    • If you're a woman aged 75 or younger or a man aged 72 or younger and in good health it's probably good to cancel.
    • Between those ages the difference isn't likely to be great, just use your personal preference.
    • If you're in Scotland or a very poor area, or did manual labour instead of office work, reduce those ages by three years for each.
    • If you're in a rich area or a professional like a doctor or solicitor, increase the ages by three years for each.
    • If you have heart trouble, smoke or are very overweight decrease the ages by three years for each.
    This depends on the actual payout of your personal policy. Perhaps there are some historical policies that have generous rates, I don't know. In order to make a general assessment, you need:
    • monthly payment
    • assured amount
    • age
    • sex
    And then you can make health/lifestyle adjustments



    The education, regional and health factors are very crude but enough to give some idea of how things change and produce somewhat decent results, though a more detailed tool could definitely do better. At the extremes:

    Man in Scotland who was a labourer, has artery disease, smokes, drinks a lot and is obese, good to continue paying in from age 62.
    Woman professional in a rich area with no health trouble, good to continue paying in from age 86.
    I think you are conflating risk factors and indicators of those risk factors, but the two are not the same.

    Someone who is a labourer or Scottish is more likely to make bad lifestyle choices, SUCH AS poor diet (artery disease?), smoking, obesity, excess drinking, and so on. But if you are a Scottish labourer eating healthily, enjoying a decent pension, exercising regularly, etc., then those factors are what count, and your life expectancy will be on the right-hand side of the curve. Being Scottish does not shorten your life expectancy, and you shouldn't adjust based on it for individual cases - it's only useful for considering the cohort as a whole (e.g., do people in Scotland get a worse deal from these schemes than people in England), not for individuals.
  • jamesd
    But that to me is the biggest problem with the article. ... You cannot ignore investment returns.
    Originally posted by thelawnet
    True.

    Here are US mortality rates by age ... (can't find UK ones)
    Originally posted by thelawnet
    ONS probably has some, you might try some searching around their site.

    I think you are conflating risk factors and indicators of those risk factors, but the two are not the same.

    Someone who is a labourer or Scottish is more likely to make bad lifestyle choices, SUCH AS poor diet (artery disease?), smoking, obesity, excess drinking, and so on. But if you are a Scottish labourer eating healthily, enjoying a decent pension, exercising regularly, etc., then those factors are what count, and your life expectancy will be on the right-hand side of the curve. Being Scottish does not shorten your life expectancy, and you shouldn't adjust based on it for individual cases - it's only useful for considering the cohort as a whole (e.g., do people in Scotland get a worse deal from these schemes than people in England), not for individuals.
    Originally posted by thelawnet
    I agree. I was mixing the two deliberately, using some personal factors and some indicators to keep things simple. Should really be done with more in depth individual questioning. Good enough for my purpose - a short post to illustrate a conceptual way of varying things - but definitely imperfect. The personal risk factors aren't really independent of each other either but trying to get into that would have been way over the top...
    Last edited by jamesd; 05-04-2012 at 10:18 AM.
  • thelawnet
    True.

    ONS probably has some, you might try some searching around their site.
    Originally posted by jamesd
    I did, though only up to age 89 The US figures for 90+ seem to fit so I used those for ages of 90 and above for my spreadsheet:

    http://www.!!!!!!!!!!!!/document/3BBzPnmA/actuary.html

    These plans have rather more variations than discussed in the article.

    For instance the Asda/LV policy has a capped policy, where you won't pay more premiums than you get out.

    Now it's a given that these policies are almost always a bad idea, in the first place, but if you've held a capped policy for a long time, it's a better bet to keep it.

    E.g., Asda/LV 50+ plan, male age 70 assures 6,034 @ 50 PCM with uncapped premiums, or 4,281 @ 49.34/month with capped premiums

    The expected value of these policies (taking into account the risk of dying in year 1) is -2,668.81 and -1,156.10 respectively. Both a poor deal, but because the cost of capping (with Asda/LV) is constant with age, the older you are the better a deal it is (since for a younger person the assured amount, by the time of death, will be ravaged by inflation anyway).

    After 3 years of payments, however the capped policy is worth 312.52, while the uncapped policy remains resolutely an absolute stinker, with an expected value of -1583.99

    Basically, although an uncapped policy is also a bad deal, unless you are either young (closer to 50 than 70), or just took it out very recently, it's worth keeping. A capped policy - not so much.
  • PaulFD
    Find a funeral director that offers a pre-paid funeral plan. Preferably with the Funeral planning services. Google their website. The money is held in a trust untill needed.
  • thelawnet
    Find a funeral director that offers a pre-paid funeral plan. Preferably with the Funeral planning services. Google their website. The money is held in a trust untill needed.
    Originally posted by PaulFD
    Which could be a long time, earning a nice fat profit for the Funeral Planners.

    It's no better than a 50+ plan.
  • SiWilts
    These plans are fine if you're someone in bad health or maybe have had major heart surgery, for example and still remain in bad health.
    Then there's a greater chance you won't pay more premiums than the amount of life assurance that you're covered for.

    So these policies can be decent value but can also be bad value. Not much different from any kind of insurance really.

    How many of us have paid house insurance premiums for many years without needing to claim?
  • andy2004
    My mum took out the plan mentioned above, and after paying it and getting to the point where she's going to pay more than what she would get back on death, decided to stop paying.
    Few facts. 1 i told her not to take it out in the first place, that it would be better to pay it into a bank account like an isa.
    2 i told her before she cancelled it that she wouldnt get a penny back, but after my sisters phoned them and had a word with sunlife who said on her death they would pay out some of the amount but it wouldnt be the full amount even if she cancelled and stopped paying, so my sisters cancelled it for her, whilst my sister was on the phone with them, dont remember getting any letters from them about the phone call.
    But we still get letters from sunlife asking my mum to take out a new policy of the over 50's which she chucks in the bin.
    Personally believe the sunlife rep was lying to my sister, but i guess its to late to do anything about that as it was about 3 years ago.
    my sister i do remember said all we had to do when my mum dies is phone sunlife and give them a number to receive payment.
    I'm waiting on the day i can say i told you so to my sisters, they think they know better than me, i told them after my sister finished speaking to sunlife they where lying to her about the cancellation and yes your mum would get a pay out on her death.
  • norbet
    Which could be a long time, earning a nice fat profit for the Funeral Planners.

    It's no better than a 50+ plan.
    Originally posted by thelawnet
    You should also consider that the cost of funerals also rise. You could buy a pre-paid funeral plan now and no matter what the cost of it is when you die your funeral cost will be met.
    In that sense I'd say it's better value than a 50+
  • davidanddeirdre
    I find it difficult to understand why people worry about what will happen to their bodies after they are dead, even more difficult to understand how they let themselves be conned by insurance companies into parting with money unnecessarily for years or decades. No-one other than those of working age with children or other dependents to worry about should need to take out life insurance. As for funerals, if the nearest and dearest want to attend something more lavish than a minimalist funeral, then they can pay for it. In my case, there is currently enough for a decent party which is what I hope they will have, just sorry I won't be able to attend. If in my later old age all my assets have been swallowed up by care homes, well so be it.
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