Whole of Life Policy: great deal or late-life burden?

Bonekicker

Thirty years ago we took out a Whole of Life policy in trust for our daughter, to cover any inheritance tax liability. It was a good deal, paying out £100,000 on second death for a premium of £28 a month. Now our provider has begun to signal increased premiums and reduced benefits at the next review, around when we turn 70. At the moment the ‘cash-in value’ of our fund stands at £14,000, which is more than we've paid in over the years. My gut feeling is that our great deal is about to become a late-life burden as our provider looks to mitigate their £90,000 shortfall.

What I’m anticipating is a steep and steady increase in premiums, while the fund gets run down to subsidise the benefits. And that the premiums will eventually become unaffordable, by which time there’ll be nothing in the fund for our daughter when we’re forced to cancel. To me this feels like a good moment to cash in and step away. Our daughter gets the fund and we've had 30 years of cheap joint-life cover. Inheritance tax rules have changed and our estate falls below the threshold, so the original purpose has gone.

But before doing anything I ran it past my financial advisor (whose speciality is investments, not insurance). His advice is to keep paying in because "even if they raise the premiums a little bit it's still going to be a good deal."  Bearing in mind what they say about deals that look too good to be true, I’ve searched the forum but found nothing much recent on the subject. Will welcome any informed insight.

tacpot12

Given that the original purpose has gone, I would agree that now is a good time to cash in. I also think there is every  likelihood that the the premiums will become unaffordable before you die, so it will never pay out anyway.

Of course the inheritance tax rules could change again, but I think as long as you keep an eye on this and have some cash savings that your daughter could use to pay any IHT immediately without having to sell any property then everything will work out fine.   

dunstonh

It was a good deal, paying out £100,000 on second death for a premium of £28 a month.

A good deal would have been a WOL with guaranteed premiums rather than reviewable.

My gut feeling is that our great deal is about to become a late-life burden as our provider looks to mitigate their £90,000 shortfall.

An investment backed WOL from 30 years ago probably had a high target growth rate (based on gross returns from that era). Gross returns are much lower today (although net of inflation, not dissimilar).   So, you have the double whammy of living longer than expected 30 years ago and returns being lower than expected 30 years ago.

Old_Lifer

You are correct,  the policy will become increasingly expensive.

In effect, you are buying £100,000 of life cover each month and the cost of providing that cover will rise each year as you age.  You will eventually be asked to pay a higher premium or suffer a reduction in the sum assured.  At each following review, as the cost of buying the life cover rises,  you will be asked to pay even more or suffer a further reduction in the sum assured.

At least you have recognised the problem.   We often have posts from those who have reviewable policies.  I and other Forum members regularly answer these posts.   If you click on my username and then click on 'replies'  you have only to scroll back a few pages  to find a  number of  these queries.

thegreenone

We cashed in our, increasingly rising, £100,000 WOL last year to get us through Covid unemployment.  We started at £30 and it rose to £98pm.  It didn't pay out much but as we'd paid our mortgage off in 2019, which was the reason for taking it out, it kept us afloat until new jobs came through.  We do have another, smaller policy in place.  

If it is worth £14k, my advice would be to cash it in and open a joint account with your daughter.  Put the money in and that will pay for funerals and bills.  I can't thank my late Mum enough for opening a joint account with me and providing enough money to pay for her funeral and, eight months later, still paying all the bills for her property until it completes.

There was an article in the DM recently about a man who's payments have sky-rocketed to £700 a month!!!!! I'm sorry, I've looked for a link but can't find it.

Bonekicker

dunstonh said:

A good deal would have been a WOL with guaranteed premiums rather than reviewable

A fair point, though as young parents our thinking was more medium-term; sorting out our wills and having to nominate a guardian had focused our minds on would happen were our child to be orphaned while underage and dependent. It's not such an issue now she's an adult and building a life of her own. The fund's in trust so it goes to her at a useful time if we cancel now.  My fear is that if we wait until we've no choice, she may get nothing.

Bonekicker

Old_Lifer said:

If you click on my username and then click on 'replies'  you have only to scroll back a few pages  to find a  number of  these queries.

Did that and found several relevant discussions that weren't picked up by my "whole of life" search, so thank you.

Sandtree

Bonekicker said:

dunstonh said:

A good deal would have been a WOL with guaranteed premiums rather than reviewable

A fair point, though as young parents our thinking was more medium-term; sorting out our wills and having to nominate a guardian had focused our minds on would happen were our child to be orphaned while underage and dependent. It's not such an issue now she's an adult and building a life of her own. 

Then a fixed term policy rather than whole of life would probably have been more appropriate

Bonekicker

 I've taken the first step and contacted the company. I'm holding back on a final decision until I have all the information, but what I’m reading here and elsewhere has strengthened my instinct to surrender the policy before the premiums increase, while the fund is still healthy. It would be ironic if a claimable event were to happen immediately after, but with a policy written on ‘second death’ the odds are against it.

They've said there’s no exit penalty but I’m hoping the company’s info will resolve whether the payout in trust to my daughter will be taxable. The gov.uk page on chargeable event gains seems to suggest that it will and that it won’t, both in the same paragraph.

IdrisJazz

If you can get back more than you've paid in over all those years, when you also had cover at the level you needed, it's hard to argue you got a bad deal.

Once you hit 70, there are other ways to ensure that your children are taken care of financially - such as pension pots, and property, as well as savings. Life assurance past that age is an expensive way to do it.

Consider what else your daughter would receive when you both die and whether that £100k is worth paying through the nose for. Eventually it will get very expensive indeed.

Bonekicker

So, to update - after serious consideration that included the informed advice found here, we chose to surrender the policy.

It was a smooth process with no deductions or exit penalties. The money was paid into the account from which premiums were debited, and we immediately transferred it to the beneficiary in trust. A few days later we received a Chargeable Event certificate showing a gain of just over ££5,000 (the difference between the surrender value and the premiums paid in). The gain carries a notional tax credit of 20%, so there shouldn't be any further tax to pay.

(A caveat for anyone who's thinking of doing the same; according to my accountant, because we didn't die any further tax liability would be split between us, the policyholders, rather than being on the beneficiary. But it would only kick in if either of us were to become a higher rate taxpayer in the year of surrender.)

The real bonus for us is peace of mind. We've had it for 30 years knowing we had good life cover when it was needed, and now we won't have to deal with the uncertainty and apprehension of being driven out anyway. The fund made a profit and the kid gets some money at that time in her life when she can more readily use it.