Should I change my Unit linked Whole of Life Insurance policy?

Galwaygirl2k

I have joint life insurance policy for both myself and wife that we took out to run alongside our endowment mortgage 25 years ago, the mortgage has now been paid off and were are unsure whether to keep the policy going or change to different type.
The existing policy is a:
Unit linked Whole of life which includes death cover £51,000 & Critical illness cover £51,000
We pay £36 month and the policy has a value of £1,200.
We are both in our 40's and have 3 dependant children.
Are there any advantages of keeping this policy going or cashing it in and getting a different life insurance for example like a fixed term?
I believe Unit linked Whole of life are more expensive than term insurance and ideally I would like to increase the cover to around £100,000 as originally the £51,000 was just to cover the mortgage.
It would be interesting to hear other peoples thoughts and if they have had any similar experiences.
Thanks 

dunstonh

Should I change my Unit linked Whole of Life Insurance policy?

It's worth noting that these types of plan went obsolete around 1995 although you can still buy a variation of it today but its very very niche (non-investment linked with guaranteed premiums being the preferred option for most).

Are there any advantages of keeping this policy going or cashing it in and getting a different life insurance for example like a fixed term?

Potentially yes.   

I believe Unit linked Whole of life are more expensive than term insurance 

Yes. The investment element has to have money going to it that would not exist on a non-investment linked policy.

Old_Lifer

I would strongly urge you to look at the policy to see if the premiums are reviewable.   If the premiums are reviewable, you will eventually be asked to pay more  or suffer a reduction in the sum assured.   At the next review after that you will be asked to pay even more   or suffer an further reduction in the sum assured.   If you do have a reviewable policy it is important that you are aware of it now, rather than sleepwalk into the situation I have described.

Galwaygirl2k

The premiums have been reviewed several times and increased during the course of the policy and yes if I didn't increase the premium then sum assured was reduced.
So I have a dilema of keeping the existing policy or changing to a life term.
If I took out a new life term poliy I can get death cover £100,000 & Critical illness cover £100,000 for roughly the same I am paying now for £51,000.

Old_Lifer

If you decide to take -out a new policy,  you should wait until the new policy is in force before deciding the future of the old policy.

With regard to the existing policy,  as the cost of life cover increases with age and as the premiums are not fixed,  the cost of providing the life cover will increase each year and at each future review you will be asked to pay an ever rising premium or suffer an ever reducing sum assured.    As retirement approaches and beyond many policyholders with reviewable policies will struggle to meet the ever rising cost until eventually the policy terminates with no value.

Weighty1

Benefits of keeping the plan:
  It's whole of life plan so would be guaranteed to pay out at some point if you kept up with the premiums.
Downside of keeping the plan:
  The premiums are likely to be reviewed periodically, especially as you age and will likely result in premiums increasing significantly or the cover amount being reduced.
  Depending on the provider there could be far more comprehensive critical illness plans out there now.

The question is, do you even need a whole of life policy?  For most, once mortgages are repaid and children grown up then the major need for life insurance has gone and only things like funeral costs need dealing with.  Personally, I think it would probably be worth reviewing this and coming up with something which matches your circumstances NOW, rather than what your circumstances were years ago.  Simply make sure you use a reputable firm that will point out both the pros and cons of keeping and replacing the existing plan.

rob014

A cautionary tale:

On 5th February 2021, Martin Lewis published an article on Moneysaving expert.com pointing out some of the pitfalls with over 50s life insurance policies. One the points not mentioned is that policies can be put into trust for dependants, thus ensuring proceeds are outside probate and not subject to tax.  This makes them potential vehicles not only for dealing with funeral costs, but maintaining houses while probate is obtained, and for helping to meet any IHT liability

To this end, my parents took out a “Joint Life Last Death” insurance policy linked to a unit trust. The scheme involved paying an initially inflated premium which was used to buy investment units. Some of these units were then sold monthly to cover the management and insurance costs. The assumption was that the value and number of the trust units would increase with time, creating a reserve which could be drawn on in the later years of the policy to offset the rising premiums as they grew older. When the last of them died the policy would pay a substantial sum, tax free, to me.

The pitch was that, for a premium of £2.5k for every year from then until the second death, shortly after that event and independent of probate, the company would pay the beneficiary (me) the sum of £100k, tax free. My father managed to get sufficient detail of the scheme to construct a spreadsheet model of the scheme which, projected 30 years ahead, showed that a 6% return would indeed cover them to their mid-90’s. Over time, there has been the option to increase cover by increasing the premium, something that they took up a number of times.

A “No review for 10 years” was seen as a selling point. In the contract terms, however, the only reference to “review” is unusually vague compared with the very careful wording of the other terms. Now the 10 years have passed it has come to mean “Only guaranteed for 10 years” as a basis for increasing costs or reducing benefits. The company is reluctant to discuss the mechanics of “review” preferring to leave it in the air but implying that it means they could do what they wished. The Ombudsman seemed to support that view as does my Solicitor.

If, to a lawyer, the term “review” means the company can do what it likes then the original offer was a scam. An ordinary person reading it would have a misleading impression of what they were buying, and the spreadsheet model was useless. The company had no intention of paying large sums on the death of 90-year-olds unless they were prepared to pay a hugely increased premium, something the original scheme specifically set out to avoid.

A number of steps have clearly been taken to avoid this eventuality and reduce the liability to the company:

 

 

Switch in funds

The fund initially used for the scheme realized the 6% growth as predicted. In the year of my father’s 80th birthday the company wrote saying this fund had a number of administrative problems and they were therefore absorbing it into a new fund they had created.  It is understood that the company has the right to manage the funds as they see fit but, in this case, the company deliberately created a fund which had all the trappings of a real fund but produced a net zero return, for many years. Given that the return on the fund was a critical element of this policy and the original fund had achieved a 6.9% return for the previous 9 years, it is difficult to see this as anything but deliberate sabotage. Clearly the change had an impact on the balance in the account and effectively destroyed the original concept of the scheme.

Unexplained hike in insurance charge

In the policy renewal documents for 2019 the company said it had decided to increase its insurance charge by almost 40% due to “recent statistics”. This had the effect of either doubling my premium or accepting that the scheme would run out of money two years earlier than expected. We noted from the spreadsheet model that the increased charge was equivalent to adding 2 years to my father’s age. He complained and asked for proof that the new rate complied with the policy terms, but the company is world class at stonewalling and after a few exchanges suggested we should make an appeal to the Financial Ombudsman Service. Their report accepted the company’s claim that the increase in premium was partly due to the poor return on the fund, disregarding the fact that this situation had been deliberately created by the company. It also noted that the policy was only guaranteed for the first 10 years, and seemed to accept that the company’s right to review meant they could do what they liked and apparently saw nothing remarkable in the near 40% increase.

Review period.

The company’s novel twist is that, although the reviews occur annually the company requires the account balance to be maintained not only for the year under review but also the following four. If the account balance is insufficient the Sum Assured can be reduced (thereby reducing the insurance charge) until it is. By this means, unless the premium is greatly increased, as the policy approaches maturity the sum assured can be reduced in stages to, in this case about £15k, from the original £215k.

My father expects each year to be offered a choice between a substantial cut in the Assured Sum or a multiple increase in the premium, not a situation we or the Financial Adviser could have reasonably foreseen in 2000.  There must be many other policy holders in the same position, but probably not many who monitor their policies so closely. The issues have been raised with Which? magazine, the Sunday Telegraph and BBC Radio 4’s You and Yours programme, the FCA and of course our solictors but nobody else seems concerned.

 

 

Conclusion

It should be remembered that financial services companies, like others, exist to make a profit. If one considers the opening pitch of this policy, it would take 40 years for the premium income to exceed the sum assured.  The premiums plus the growth of the fund have to pay the management fee, the growing insurance fee plus any profit margin. This is quite unlikely, even if the fund grows at an above average rate.  So where is the profit coming from in this case? The strategy appears to have been to engineer the fund so that it cannot meet its objectives, thus forcing up the premium until lots of people cancel their policies. The fact that the financial ombudsman thought there was nothing wrong with this suggests that this behaviour is quite normal. As Martin points out in his article, one needs to have a better than average chance of dying in the first few years in order to make these policies worthwhile.

 

Having said that, in our case the sum of the premiums have still not quite exceeded the (now reduced) sum assured, and since the premiums come from the estate anyway they reduce the IHT burden accordingly.

dunstonh

To this end, my parents took out a “Joint Life Last Death” insurance policy linked to a unit trust. 

That is the old fashioned way.   Nowadays (since about early 2000s) you can get pure life assurance with no investment element nowadays and with guaranteed premiums.   

A “No review for 10 years” was seen as a selling point. In the contract terms, however, the only reference to “review” is unusually vague compared with the very careful wording of the other terms. Now the 10 years have passed it has come to mean “Only guaranteed for 10 years” as a basis for increasing costs or reducing benefits. The company is reluctant to discuss the mechanics of “review” preferring to leave it in the air but implying that it means they could do what they wished. The Ombudsman seemed to support that view as does my Solicitor.

They cant do what they wish but they are allowed to set the assumptions used and it would be near impossible to challenge those assumptions unless they really were unrealistic.    The assumptions are usually based on FCA guidance on projection rates.

If, to a lawyer, the term “review” means the company can do what it likes then the original offer was a scam.

They are not a scam and they cant do what they wish.

The strategy appears to have been to engineer the fund so that it cannot meet its objectives, thus forcing up the premium until lots of people cancel their policies. 

That doesn't happen.    

The fact that the financial ombudsman thought there was nothing wrong with this suggests that this behaviour is quite normal.

You are misinterpreting the information.

The reason that most of these plans have required an increase in premiums to meet the sum assured is plain and simple.   They were set up using growth rates that had been achievable in the past but have not been achieved in recent times.  Some of these plans need double digit returns to hit the target needed not to increase premiums.  That was fine back in the 90s but when inflation fell, interest rates fell and the economic cycle stopped having frequent bust periods, returns failed to hit that target.    

That meant that the pot size needed by year 10 (or 15 or whatever year the first review was) was lower than it was projected at when taken out.   A shortfall existed and it either needed an increased premium or a reduction.    However, it would repeat itself at the next review point as returns would still not match the target growth rate over the next 5 years so again, there was a shortfall.

There are plans out there that only need 4.4% p.a. (I know as I recall setting them back up in the past) and they haven't had this problem.   Its only the ones with the higher target growth rates that do.        

Hence why it is considered normal and not a scam or a wrongdoing but just a consequence of the change in the global economy and buying it in an era when they didn't see the changes coming. 

As Martin points out in his article, one needs to have a better than average chance of dying in the first few years in order to make these policies worthwhile.

Martin doesn't have an article on this type of plan.

rob014

The strategy appears to have been to engineer the fund so that it cannot meet its objectives, thus forcing up the premium until lots of people cancel their policies. 

That doesn't happen.    

Rob014: We have plenty of evidence that that is exactly what has been happening; This includes plotting the expected premium increases  according to the mortality table provided by the company, and identifying a change that exactly matched adding 2 years to his age. Also the change in funds looks very much like sabotage.

The fact that the financial ombudsman thought there was nothing wrong with this suggests that this behaviour is quite normal.

You are misinterpreting the information.


Hence why it is considered normal and not a scam or a wrongdoing but just a consequence of the change in the global economy and buying it in an era when they didn't see the changes coming. 

Rob014:   This is understood.  The problem is that my father plotted the growth of the old fund and the new, The old fund grew quite consistently, and the new fund has had virtually zero growth.  The company has taken no steps to resolve this issue. My father  has investments in a number of other funds and they have generally exceeded the 6% over the longer term.

As Martin points out in his article, one needs to have a better than average chance of dying in the first few years in order to make these policies worthwhile.

Martin doesn't have an article on this type of plan.

Rob014: i was referring to the over 50s life plan article from February. The sam principle seems to exist here - for a worthwhile payout, the policyholder needs to die before the first review. Brutal but true.