Whole of life insurance traps, advice sought

gunjin

My father (88) has 2 Whole-Of-Life assurance polcies that he took out decades ago. He is normally a very prudent, sensible person but both these policies appear to have been dreadful decisions. Not only has he now paid into both policies more than the on-death redemption value (which is fixed) but both have been subject to regular premium reviews with no fixed term (i.e. they continue going up as long as he lives). One policy, for £500k, will in a few years time require monthly premiums approaching £100k as it appears the terms allow the insurer to get away with (financial) murder. The early policy termination payout is less than £20k so the sunk cost fallacy is playing a role in him continuing to pay the premiums. There might be some modest benefit if he could terminate the policy early and book the loss against CGT but I don't believe that is possible. The other complicating factor is that the policy was sold to him by a company that is long gone and the policy has changed provider multiple times.

Yes, I am aware that this has arisen as my father has survived longer than average (and remains in good health, for which we are hugely grateful) but I was hoping to get two questions answered from those that might have experience of this sort of financial product:

1) Does my father have any recourse from the Financial Ombudsman to help extract him from this trap? I am guessing not but wanted to check.

2) Are products with potential unlimited premium reviews and minimal early termination payouts being sold today? i.e. does the FCA allow them to be sold?

Thanks very much in advance

DullGreyGuy

Why did he take out two Whole of Life policies in the first place?  For most of us term insurance is sufficient but whole of life can be used for inheritance tax planning and such

The rules and regulations around selling insurance have changed significantly over the decades that he's held these policies and what may be considered misselling now wasnt necessarily so at the time. That said the FOS does have examples of complaints that have been upheld in recent years where someone was sold a whole of life policy in the 90s when a term policy would have been more appropriate. 

Did he buy directly from the insurer or from an intermediary? Any miss selling complaint would have to be pointed at the seller and if you say they have gone then so has the opportunity to complain unless it was a direct sale from the insurer in which case the liabilities will most likely have transferred with the policies. 

The ombudsman does deal with complaints about premium escalations but like https://www.financial-ombudsman.org.uk/decision/DRN7026148.pdf the majority fail especially when sold via an intermediary.


As to your final question, yes whole of life policies with reviewable premiums still exist and some dont payout anything on early termination

dunstonh

My father (88) has 2 Whole-Of-Life assurance polcies that he took out decades ago. He is normally a very prudent, sensible person but both these policies appear to have been dreadful decisions.

With hindsight, yes.  Probably not as clear cut 20 years ago.
a) he would not have expected to live as long as life expectancy was much lower.
b) the first decade was an extremely rare event where investments lost money over a 10 year period.  And there have effectively been little or no investment return over the last 3 years.     
c) when it was set up, it would have had an effective target growth rate.   You could pay more and it would lower the target growth rate or pay less and increase the target growth rate.       If you went for the lower premium, you would not pay any more during the initial guaranteed period but if you lived longer then you would likely pay increased premiums every review point therafter.    Many people went for the lower premium option thinking they wouldnt live that long.

 Not only has he now paid into both policies more than the on-death redemption value (which is fixed) but both have been subject to regular premium reviews with no fixed term (i.e. they continue going up as long as he lives)

Reviews are part and parcel with these.  They are not new and existed from the outset.

There might be some modest benefit if he could terminate the policy early and book the loss against CGT but I don't believe that is possible. 

The life assurance tax wrapper is not subject to CGT. So, gains or losses are exempt.

1) Does my father have any recourse from the Financial Ombudsman to help extract him from this trap? I am guessing not but wanted to check.

No.   To access the FOS, you have to complain to the firm first and if you disagree with their response, then you can go to the FOS.    However, you say the firm no longer exists.  So, no FOS access exists either.

He could use the FSCS but the success rate is typically very low as it relies on a factual failing in the process.  Not because of events that were unforeseen.

2) Are products with potential unlimited premium reviews and minimal early termination payouts being sold today? i.e. does the FCA allow them to be sold?

This type of plan went niche in the mid 90s and by around 2005, you could get non-investment backed guaranteed whole-of-life assurance via IFAs but not usually through FAs or tied insurance agents.   However, this type of plan is still available.     There is nothing actually wrong with the plan as such.    The pros and cons of the plan are there for anyone to see and adults are able to make an informed choice on what they want to do.     Those picking a high target growth rate/low premium option carried the risk warnings of what could happen.

I have no doubt that the sale of the policy at the time wouldn't meet todays standards but any complaint is measured on the rules at the time.  Not the rules today.  Today, you would use the ONS life expectancy tables but even they underestimated life expectancy changes up to around 2011.

The most common scenario is that the customer thought they would be dead within the initial guaranteed period and never took much notice of what would happen if they lived longer.   So, they went with the lower initial premiums.       So, this leaves you in a position that a) ouch that its cost more on premiums but b) they have had a longer life than they expected.

gunjin

DullGreyGuy said:

Why did he take out two Whole of Life policies in the first place?  For most of us term insurance is sufficient but whole of life can be used for inheritance tax planning and such

The rules and regulations around selling insurance have changed significantly over the decades that he's held these policies and what may be considered misselling now wasnt necessarily so at the time. That said the FOS does have examples of complaints that have been upheld in recent years where someone was sold a whole of life policy in the 90s when a term policy would have been more appropriate. 

Did he buy directly from the insurer or from an intermediary? Any miss selling complaint would have to be pointed at the seller and if you say they have gone then so has the opportunity to complain unless it was a direct sale from the insurer in which case the liabilities will most likely have transferred with the policies. 

The ombudsman does deal with complaints about premium escalations but like https://www.financial-ombudsman.org.uk/decision/DRN7026148.pdf the majority fail especially when sold via an intermediary.


As to your final question, yes whole of life policies with reviewable premiums still exist and some dont payout anything on early termination

Thank you for your response.

He took them out for his wife in case he died before her (she died 20 years ago) and then for us children for IHT planning purposes.

The most egregious one was taken out direct with the now defunct insurer and the paperwork (which he still has) does not suggest misselling but possibly that is something for legal eyes to confirm.

gunjin

dunstonh said:

My father (88) has 2 Whole-Of-Life assurance polcies that he took out decades ago. He is normally a very prudent, sensible person but both these policies appear to have been dreadful decisions.

With hindsight, yes.  Probably not as clear cut 20 years ago.
a) he would not have expected to live as long as life expectancy was much lower.
b) the first decade was an extremely rare event where investments lost money over a 10 year period.  And there have effectively been little or no investment return over the last 3 years.     
c) when it was set up, it would have had an effective target growth rate.   You could pay more and it would lower the target growth rate or pay less and increase the target growth rate.       If you went for the lower premium, you would not pay any more during the initial guaranteed period but if you lived longer then you would likely pay increased premiums every review point therafter.    Many people went for the lower premium option thinking they wouldnt live that long.

 Not only has he now paid into both policies more than the on-death redemption value (which is fixed) but both have been subject to regular premium reviews with no fixed term (i.e. they continue going up as long as he lives)

Reviews are part and parcel with these.  They are not new and existed from the outset.

There might be some modest benefit if he could terminate the policy early and book the loss against CGT but I don't believe that is possible. 

The life assurance tax wrapper is not subject to CGT. So, gains or losses are exempt.

1) Does my father have any recourse from the Financial Ombudsman to help extract him from this trap? I am guessing not but wanted to check.

No.   To access the FOS, you have to complain to the firm first and if you disagree with their response, then you can go to the FOS.    However, you say the firm no longer exists.  So, no FOS access exists either.

He could use the FSCS but the success rate is typically very low as it relies on a factual failing in the process.  Not because of events that were unforeseen.

2) Are products with potential unlimited premium reviews and minimal early termination payouts being sold today? i.e. does the FCA allow them to be sold?

This type of plan went niche in the mid 90s and by around 2005, you could get non-investment backed guaranteed whole-of-life assurance via IFAs but not usually through FAs or tied insurance agents.   However, this type of plan is still available.     There is nothing actually wrong with the plan as such.    The pros and cons of the plan are there for anyone to see and adults are able to make an informed choice on what they want to do.     Those picking a high target growth rate/low premium option carried the risk warnings of what could happen.

I have no doubt that the sale of the policy at the time wouldn't meet todays standards but any complaint is measured on the rules at the time.  Not the rules today.  Today, you would use the ONS life expectancy tables but even they underestimated life expectancy changes up to around 2011.

The most common scenario is that the customer thought they would be dead within the initial guaranteed period and never took much notice of what would happen if they lived longer.   So, they went with the lower initial premiums.       So, this leaves you in a position that a) ouch that its cost more on premiums but b) they have had a longer life than they expected.

Thank you for the detailed response. Although it confirms my worst suspicions it is much appreciated for clarity's sake!

My view is that he should cut his losses and write off the £500k he has invested over the years (or whatever it adds up to). However before posting here I had not realised you could ask the FOS for advice pre-complaint so I have done this too.

dunstonh

However before posting here I had not realised you could ask the FOS for advice pre-complaint so I have done this too.

Be aware that the call centre staff are almost scripted and not knowledgeable about requirements.  They are told never to put someone off complaining unless it is really obvious.      A common script line is words similar to "it is something we would like to look at" 

There is a bit of inconsistency in your posts, probably linked to knowledge and understanding.   You say the company is defunct.   Is that the selling company or the insurer?   Its unlikely that the insurer is defunct as the policy wouldnt exist today.  Its more likely that it was through mergers or takeovers.    The selling company could be defunct and it is the seller that has the liability for the sale.    

If the selling company still exists, even through takeovers, then the FOS can be involved.  If it doesn't still exist and is defunct, then the FOS cannot get involved.  The FSCS can.

DullGreyGuy

gunjin said:
However before posting here I had not realised you could ask the FOS for advice pre-complaint so I have done this too. 

As long as you are aware that they are a basic call centre with only a typical level of training. They are much more about explaining the complaints process than anything else.

Sometimes they will offer to register the complaint for you, decline it if they offer. Unless it's changed in recent years they have a stock letter with the space for 1 paragraph to summarise your complaint in which they have to do before the next call comes in. Customers often go to the other extreme of far too much info but they dont have the space, time or skills to do a great job.