Life insurance policy notice of huge increase in premiums or huge reduction in benefits

Howarewetoday

I have a whole of life insurance policy. It was set up to be indexed linked. Premiums and benefits have risen steadily over almost 40 years that I've had the policy. I have now received a letter from the insurance company stating that it has been reviewed and I have a few options

A) Freeze premiums but receive what looks like an immediate 50% drop in benefits. It also appears to state that benefits could fall to zero over time.

B) Maintain benefits by increasing premiums. The increase in premiums would represent a 600% increase in 5 years time. Presumably they would continue to rise after that.

They have given me 15 working days to respond. As I understand it, If I don't respond by that time they have said that they will apply the first option - ie freeze premiums but reduce benefits.

I had no prior warning of this. In fact I have received letters from them in their usual style stating my new monthly premium and new benefit on death.

I have the original paperwork with the policy. The current company took over the policy from the original company.

I'd value any advice, thoughts ,wisdom etc on this please.

TIA

MyRealNameToo

You have the original paperwork so go back and read it.

It's not uncommon for whole of life policies to be written on a reviewable premium basis as this significantly reduces the premiums up front. You basically agree that the premium will be fixed for the first X years and then reviewed every Y years there after. If on review the risk has changed and/or the investment performance hasn't been as good as anticipated you are then given the choice as to maintain the level of cover and pay a higher premium or reduce the benefits and maintain the same premiums. X and Y are often 10 and 5 years respectively but there are other options available.

Whilst you are reading you should also check when the premiums are payable up until, some are payable for life others will stop on your Zth birthday but the benefits continue.

Most the time companies get it right when they buy a book of business or firms but occasionally there are errors in the transfer so its always good to check your own records.

Advice? What's the policy for? Who needs this money if you die at 110 years old? Has their need changed over time such that the lower value is still appropriate because they're not in school now or have their own career or you've spent your wealth so IHT is less an issue? If not they you may need to consider the higher premiums

kingstreet

Index linked, or unit linked?

dunstonh

I had no prior warning of this. In fact I have received letters from them in their usual style stating my new monthly premium and new benefit on death.

Investment-backed whole-of-life plans typically only guarantee the premium for a fixed period. Often 15 years, but some at 10 and others at 20. They then review them every 5 years thereafter

The current company took over the policy from the original company.

There have been a number of recent cases in which the new company found that the original company failed to carry out the reviews correctly. This has led to what can seem quite a substantial difference as effectively, the new company is catching you up.

These old-fashioned plans did not guarantee premiums. In the early years, when you were younger, there would be an excess that went to investments. In the later years, when you are older, the increased cost of life assurance would come from the premium and any shortfall come from the investments. If the investments were on track to run out of money, then the premium would be increased at the review point.

These older reviewable whole‑of‑life plans are usually set up on either a “maximum” or a “minimum” basis. On a maximum basis, the insurer assumes a relatively high investment return when they set the plan up; this gives you a higher initial sum assured for a given premium, but it’s more exposed to increases in premiums or reductions in benefits at review if actual returns are lower than assumed. On a “minimum” basis, the insurer uses a lower, more cautious assumed investment return, so the starting sum assured is lower, but the plan is more sustainable and less likely to need drastic changes at review, because it was set up on more conservative expectations from day one. Some providers had a middle option or a selectable target growth rate.

With plans from the 80s, you typically find that the growth expectations were higher than today as gross long term returns were higher back then. They didnt predict the gross lower returns over the 2000s.

Howarewetoday

I kind of understand but…is there nothing stopping a company from providing a whole of life policy, proviing annual summaries that show a steady increase in premiums and a steady increase in value. For 40 years or so.

And then for that company to opt to increase the premiums by whatever percentage that they wish - should the customer want to keep the benefits or cut the benefits substantially, potentially to zero should the customer want to sustain the levels of premium?

If companies are allowed to do this I can see no reason why anyone would take out whole of like insurance as they stand to make 40+ years of investment only to receive nothing or next to nothing.

Is there no regulation to protect companies from this?

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/comment/81911093#Comment_81911093

Yes, they are heavily regulated firms and its also why the Financial Ombudsman hires a load of actuaries so that when highly technical complaints come in they have people skilled to review the evidence provided by the insurer to deem if its fair or not.

Whole of life policies are a bit of a niche, most people won't have financial dependents at 75+/ end of their lives that need anything more than a what a spouses pension would give on their passing. One common use for them is for IHT planning in which case they are written as joint life, second death given thats when IHT bites. Investments then become more problematic because they themselves will be subject to the 40% IHT

kingstreet

Unit-Linked Flexible Whole Life contracts were mostly marketed by the direct sales outfits like Allied Dunbar and Abbey Life. Can't think why…!

dunstonh

I kind of understand but…is there nothing stopping a company from providing a whole of life policy, proviing annual summaries that show a steady increase in premiums and a steady increase in value. For 40 years or so.

Nothing is steady with investments. Insurance cost isn't steady either. Its more of a curve as you get older.

Then you have different modelling assumptions based on expectations of the time.

Investments on the 1st Jan 2000 were lower ten years later. A very rare event. Modelling wouldn't have that scenario is a likely outcome. Modelling is much more advanced today than it was in the 80s.

Part of the problem is that the projection rules assume an average annual return but it doesn't work like that.

And then for that company to opt to increase the premiums by whatever percentage that they wish - should the customer want to keep the benefits or cut the benefits substantially, potentially to zero should the customer want to sustain the levels of premium?

they cannot increase it by whatever they wish. They will be looking at was is sustainable based on reasonable assumptions.

If companies are allowed to do this I can see no reason why anyone would take out whole of like insurance as they stand to make 40+ years of investment only to receive nothing or next to nothing.

Hardly anyone buys a whole of life assurance nowadays. It's a very niche option. However, it is possible to buy non-investment-linked whole of life assurance today with guaranteed premiums.

Investment linked life assurance products started their decline in being offered in the 90s and were largely gone from the mainstream in that decade. You can still buy a handful but most would not. That said, modern versions tend to have much lower target growth rates and cost more because they put more into the investment side to try and avoid premium increases.

Is there no regulation to protect companies from this?

yes. But the increases you are seeing are not wrong. Indeed, currently you are probably a winner as you have avoided all previous increases that should have applied. The downside is that the jump to put it back on track is bigger than had it been smaller increases every 5 years.

Howarewetoday

Looks like we'll go for the same premium / half benefit which seems to be guaranteed for 5 years. I'll want this confirmed in writing though, obviously. Hardly ideal, but the lesser of the two evils.

It has something of the mortgage endowment feel about it, but without the compo.

Given that the company has had thousands from my hard earned cash and has returned nothing, I'll be quite interested if they get to a point where they quote a return that is less than I've put in - ignoring the many years of compound interest. Some way off yet to be fair

Presumably such a scenario would suggest that their fees have been very high and their investment decisions very poor.

thanks for the wisdom all

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/comment/81913746#Comment_81913746

Insurance works on the concept of the common pool… you dont get the £250 premium you paid for home insurance back if you dont make a claim, its not sitting there accruing interest but instead has been used to pay the £150,000 claim they had to pay someone else who's home had a major fire. All the monies paid are collectively used to pay everyone's claims.

Whole of Life is technically assurance rather than insurance because the question is when will it be paid not if it will be paid but it's still a similar concept. A friend died 6 months after taking out a policy he'll have paid in less than 0.01% of the monies his widow got, again funded by all those others who've paid in much more.

Some policies do cease premiums once you hit a certain age, again reading your policy book will say