Charges on whole of life insurance

Brackenfield

Hello, not been on this part of the forum before...


A relative has a whole of life insurance policy and are paying just over £100 per month towards this.  However, the fees on the policy are actually a few quid over what is paid each month.  Effectively the policy is eroded by admin fees.

Does this sound right, is it standard?

 Policy started in 1997 and has £24k paid in but sadly only worth £10k and they are saying premium will need to be increased...

Old_Lifer

The policy is reviewable.    The cost of the life cover will increase each year with age and later in life,  the   annual rate of increase rises ever more rapidly.    This cost is deducted from the premium  and  eventually also eats more and more into the investment pot.     The policy is usually reviewed every five years and the point  finally arrives  when the policyholder  is asked to pay a higher premium  to maintain the existing level of cover or suffer a reduction in the amount of life cover.      At the next  review after that,  the policyholder is asked to pay a still higher premium or suffer a further reduction in life cover.    And so on, at each following review.

The cost of purchasing your relative's life cover will continue to rise each year and the policy will get more and more expensive.

We know  nothing of your relative's circumstances or state  of health  but  may I be permitted to suggest that they consider very carefully the amount of life cover they actually need.

tacpot12

It does sound right for a product that has been held for some time. My partner has a similar sort of policy. They pay a bit less than £100 pcm, some of which pays for the life insurance cover, the rest of which is invested in order to pay the increasing premiums in later years. The idea is that the compounded investment returns will keep the policy running much longer than if the only the premiums were paid as they we due. Charges erode the amount of investment as money goes in, and also erodes the value of the investment each year, but the life company's costs have to be paid somehow, so it is not entirely unreasonable (although the level of charges may mean the product is a bit of a "cash-cow" for the life company).

The charges and the way that the product works would have been explained to your relative, but few people take the time to really understand how such financial products work. I worked for a financial modelling company in the 1980s and when a group personal pension was introduced for employees, I modelled it using our software and was somewhat horrified at the effect of charges.

Old_Lifer

When reviewable life policies were first introduced,  the idea was that when the mortgage had been repaid and the kids had flown the nest, the life cover  could be reduced.      Keeping the life cover in force for the original amount  as retirement approaches and beyond  becomes increasingly  expensive.     Many will struggle to meet  the ever rising cost of the life cover until  eventually the policy becomes unaffordable.     Looking at the cost of the policy now   is preferable  to spleepwalking  into  that situation  through complacency.

Brackenfield

Thanks for the input everyone.  Relative is mulling over whether to continue.