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

rob014

A cuationary tale for anyone who still has this type of policy :

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

In response to the comment above, it has been pasted to a couple of threads now.   There are mistakes in the understanding by the poster and I am not going to repeat my response again as spamming the same section with duplicate posts does not help anyone.

rob014 seems to have not taken any notice of what was said in a thread posted in 2020 that explained it.  Or a response a few days ago that explained it again.

Bonekicker

"One needs to have a better than average chance of dying in the first few years in order to make these policies worthwhile"

While this is true, hedging against this eventuality is the entire point of taking out any policy. As we've now cashed out and got back close to 150% of what we'd put in - equal to a modest annual growth, with cover in place throughout - I don't feel hard done by. I'd have been less sanguine if we'd hung in and reached the point where we were effectively driven out. I must say that after searching the web and finding next to nothing on the topic, this forum proved to be the only source of useful and reasoned advice.

Bonekicker

From The Times, June 01 2024 (paywalled):

I’m 94 and now Aviva wants £15k a year to keep my life insurance

For three decades Elizabeth Geals paid £1,819 a year for her life insurance policy.

Then last year she received a letter from her insurer, Aviva, to say she would have to pay £11,240 if she wanted to keep the same level of cover — which ensures her family will get a £90,000 payout when she dies.

It was the first time her premium had increased and Geals, 94, agreed to pay it. But last month another letter came to say her premium would rise again to £15,437 this year.

“It has made me quite upset and very worried. I don’t expect to live much longer. To lose the £90,000 after paying in all this time seems a bit much,” said Geals, from Inverurie, in Aberdeenshire.

dunstonh

Bonekicker said:

From The Times, June 01 2024 (paywalled):

I’m 94 and now Aviva wants £15k a year to keep my life insurance

For three decades Elizabeth Geals paid £1,819 a year for her life insurance policy.

Then last year she received a letter from her insurer, Aviva, to say she would have to pay £11,240 if she wanted to keep the same level of cover — which ensures her family will get a £90,000 payout when she dies.

It was the first time her premium had increased and Geals, 94, agreed to pay it. But last month another letter came to say her premium would rise again to £15,437 this year.

“It has made me quite upset and very worried. I don’t expect to live much longer. To lose the £90,000 after paying in all this time seems a bit much,” said Geals, from Inverurie, in Aberdeenshire.

Some people are just so unhappy about being alive.

DullGreyGuy

Fire extinguishers and insurance are the two classes of product that most people buy and hope to never need to use. 

Whole of Life assurance has its place, particularly joint life/second death, but many buy it (rather than being sold it) without a real need and are head in the sand about the reviewable premiums.