Concerns about life insurance

cadenza82

My parents, both now over 65 and retired have been paying into a life insurance policy since 1986. They took it out when we moved house and changed the mortgage. When we moved again two years ago, we were told that it would also cover the new small mortgage they took out.

Firstly, I should say I don't really know anything about life insurance - I'm probably totally naive about it, but it's never something I've needed to consider. So far as I understand, it's a whole of life policy, so pays out when one of them dies.

What concerns me is that monthly premiums have continued to rise, considerably so over the past few years. They've been going up between £80-£100 a year for about the last four years, but last year went up £120. This makes it a big chunk out of their monthly income and it seems to be one which continues to rise at a rather alarming rate.

At the present time, the death payout is £52K and the market value is £13K. In the last nine months, their premiums bought 113 'units' of which 100 went to pay the company's charges. I suppose as is always the case with these things, apart from the mortgage issue, £1,500 a year now (the current annual premium) would probably be more use than a larger sum 10, 20, 30 years down the line...but, that's not how insurance works!

The answer is probably 'no' but is there anything we could do to look further into this? Maybe there are other options or solutions which we haven't considered? I suppose that my ongoing concern is the continuing increase in monthly premiums - if the increase next year is the same, it'll be up to over £1,600 a year which is a lot of money.

Any ideas?

David

kingstreet

This is probably an old-style unit linked whole-life policy.

The premiums are invested in units in a particular fund, then the units are regularly cancelled to pay for the life cover and to meet fund and management costs.

As you get older, the cost of such cover rises, because it's based on the then age of the policyholder(s). Seeing the premiums increase regularly is probably down to a combination of poor investment performance of the fund in which money is invested and the cost of providing the cover.

IMHO they should discuss the plan with an Independent Financial Adviser with a view to reviewing its future and a possible replacement where they can exercise more control over the cover/premiums.

cadenza82

Thanks very much for that - that makes sense and I'm sure that's the sort of policy it is (I'm pretty sure it's been described as old-style in the past!).

What would be the options which might be suggested by a financial adviser? Would it be to cash it in as it is and start a new one?

kingstreet

The options will be;-

- continue as is
- continue with reduced sum assured/premium
- stop premiums and make plan "paid-up"
- stop premiums and surrender,

in the event of stopping cover look at alternative life cover options.

An IFA is really the best route for such comparisons. Ask friends and relatives for a recommendation. Failing that, try https://www.unbiased.co.uk, turning off the "website/email only" option so you get a full list, not just the paid-for adverts.

dunstonh

financial products are like any retail product. They age. Some age well. Some age badly. Modern alternatives are not always better but in general newer, cheaper, better does tend to be the trend. It sounds like they have the equivalent of a black and white TV. Just about does the job but not very well.

cadenza82

Well, we booked an appointment with an IFA for next week so fingers crossed. He wasn't at all surprised that's what we wanted to discuss and knew what the policy was straight away.

I think what we'll have to think about is what we actually want/need to get out of any policy we have.

Thanks for your suggestions.

David

cadenza82

I've had a chance to look through the policy documentation and it is a whole of life policy, a 'Flexible Protection Plan'.

We have a letter dated July 2011 which states that following a review of the policy the premiums are sufficient to pay for the cover until 2016. In September 2011, the annual premium increased by £151.20. I wonder if this is something to do with the fact that it says we may have originally opted for an 'annual increase in death benefit'? In 2010, the annual premium increased by £101.88, in 2008 an increase of £133.20, in 2007 an increase of £115.80 and in 2006 an increase of £71.04.

Obviously this is all up for discussion with the financial adviser, but I'm trying to get my head around it first!

David

kingstreet

It sounds like the automatic annual increases in cover/premium you mention.

These can normally be "switched off" but if you do so more than once, you may find they can't be switched back on.

dunstonh

An automatic increase with a 5 year review as well. No wonder it is expensive!

cadenza82

That's right - I did some more calculations and each year they issue a new policy statement with the revised premiums and the increase in death benefit. The annual premiums have risen £600 in the last six years!

We rang them this morning and the surrender value is currently just under £12K. They also said we could simply stop paying the premiums and make the policy 'paid-up'. Is my understanding that if we did that, the overall benefit would begin to decrease as there are no premiums being paid in?

It will be interesting to see what the financial adviser thinks. Current thinking is that we might be better cutting our losses, surrendering the policy and using it to pay off the remainder of the mortgage. That way there'd be no mortgage payments and no life insurance payments, so immediately about £4,800 a year better off.

Thanks very much for your help and advice.

CJL1411

This sounds like an "old style" whole of life contract where it would be reviewed every 5 years and then potentially annually.

On some of these contracts, if you were to make the contract "paid up" then the actual premium and reviews would still take place behind the scenes and the premium would be taken from the surrender value until this went to zero and the policy would then lapse without value.

You are doing the correct course of action by speaking to an IFA as they will be able to review the specific contract and advise accordingly but beware of this possibility.

If your parents are in good health then there are replacement whole of life contracts out there with guaranteed premiums for life if they still require the cover!