Old Mutual - Cashing in Life Insurance Policy

londoner2009

I have a question from my father who is in his early 70's.

His father set him up with a life insurance policy with the South African Company Old Mutual when he was young.

Now they have sent him some kind of letter in the post to him saying they want to cancel the policy and pay him off.

The figures they have given are basically as below (rounded off):

Surrender Value now: £14,000
Death Value: £21,000

Their Offer: £17,000

Any advice? I don't think he particularly needs the money right now and seems happy either way to take the £17,000 offer or let my mother have the £21,000 on his death - He's in good health and my mother is about 5 years younger then himself.

I seem to remember seeing things on TV about being able to sell your life insurance policies, etc? I have no idea how this works and how much hassle it is.

Does the £17,000 seem like a good offer, is there a better alternative and is there anything else to be aware of like possible taxes to pay, etc?

dunstonh

I seem to remember seeing things on TV about being able to sell your life insurance policies, etc?

Normally only endowment policies. Not whole of life plans or unit linked plans.

Does the £17,000 seem like a good offer

How much is he paying?

londoner2009

dunstonh wrote: »

Normally only endowment policies. Not whole of life plans or unit linked plans.


How much is he paying?

About £25 a year - this policy was setup like 50 or 60 years ago when him and his family lived in east Africa.

londoner2009

OK, so I started reading the long 70+ pages they've sent - it seems that what has happened is that there are only about 900 people in the world with this policy and they expect most people to die within the next 10 years

keeping a company running for just 900 policies is expensive and it's simpler and cheaper to pay all 900 people off now and close the company.

They're offering about £17,000 but I see there's a box to put your own figure in and give a reason why you this this is a better valuation.

What do you guys thing would happen if we put in a higher figure and for what reason?

I can't see why rather then just accept their offer (of £17,000) we can't put in £18,000 or £19,000 - at the end of the day they lose out of they have to keep this tiny company running and pay fixed costs like people's wages, rent for buildings, etc so a few extra thousand is good for for my parents and not much skin off their noses?

With only 900 policy holders it seems each person's vote carries a lot of weight.

dunstonh

Old Mutual have more than 900 policy holders. They are a very big company. They have hundreds of thousands of customers in the UK alone and own one of the biggest UK fund supermarkets and a major investment insurer. I think you will find its 900 policyholders of that type of plan. Its not uncommon for insurers to attempt to close a policy type that has so few numbers.

You can try for a bit more. If you dont ask you dont get. However, dont put it down it on the basis that the company is tiny as that wont encourage them to go for it.

londoner2009

Well I know Old Mutual itself is big, but they've obviously setup some company in Bermuda or something to run this particular policy and whatever it's costing them to keep running is probably more then the value of the yearly policies.

As I see it my dad isn't that bothered either way - if he wanted to cash it in he'd have done so years ago. If he dies tomorrow Old Mutual have to pay out over £21,000 to my mother. And if he took their £17,000 offer he probably wouldn't do anything with it anyway except put it in the bank and leave it to my mother in his will.

But I reckon if he could get an extra £2,000 out of them he might see that as a bit of a bonus and finally go on that holiday to Thailand he's always talked about.

I was thinking about writing on the form a figure that is exactly half way between what they've offered and what they're liable for today if he dies.

My father has several other brothers and sister mostly older them him and one is in their mid 80's and still in great health so if he follows suit Old Mutual would have a policy that may go on another 10 to 15 years and keep gaining in value.

I can see why they'd want to close down this particular policy if they've only got 900 people paying about £25 each to them every year.

What do you think - putting down a figure of approx £19,000 - i.e. half way to what they've offered and what they're currently liable for?

Also I'm not sure if the payout comes with any strings like fee's, etc - it's a long document with lots of business and legal terms. I want to put down a figure for my dad and have that be the absolute minimum they'd have to pay after any fee's, etc.

jamesd

Don't offer half way. This isn't an insurance payout proposal, it's a business costs saving proposal and it should be treated that way. Try this instead.

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A. Cohort life expectancy for a male aged 75 in 2009 in the UK is 12.7 years, rounded to 13 years. (it's 16.8 years for a 70 year old, so use his real age). Source: Office of National Statistics central projection at http://www.statistics.gov.uk/statbase/Product.asp?vlnk=15098

Expected premium payments, ignoring effect of inflation on real value: 13 * £25.

B. Estimated costs of administering the policy: £100,000 per year. Assume five years divided among 900 holders, five years divided among 450 and 3 years divided among 225. Based on Old Mutual expecting most policyholders to die within ten years, not on my own cohort life expectancy and its death rate, which puts me well into the long term survivor group.

Administrative costs saved per policy holder to life expectancy: 5 * 100,000/900 + 5 * 100,000/450 + 5 * 100,000/225.

C. Policy value on death: £21,000.

Use net present value calculator at: http://www.business-analysis-made-easy.com/NPV-Calculator.html

Enter -25 in 1st cash flow for years 0 through 11 and +21,000 in year 12. Enter 556 in 2nd cash flow for years 0-4, 1111 in years 5-9 and 1333 in years 10-12. Enter 3% as the interest rate obtainable on the lump sum. NPV of cashflow 1 is 14,051 and cash flow 2 is 9741.

Proposed offer: £14,051 + £9.741 = £23,792.

Please feel free to make alternative proposals if you believe that the figures aren't a reasonable reflection of the benefits to Old Mutual and me.

I'm in good health and plan to leave the money as an inheritance, so the likely administrative costs are higher and the benefit of getting it early for me is not great. I've no existing interest in surrendering the policy, so I'm just making an offer that seems like a reasonable way to help Old Mutual save overall costs.

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Update with his real age and number of years until payout and send away and see how keen they are to save operating costs.