Whole of Life premium increases

D_Dickenson

A family member is considering taking out some WOL insurance to cover the inheritance tax payment that may be required since the estate is over the threshold. The cover is for £50,000 and the premiums are initially £100/month (£1200/year). She is currently 67 years old and the premiums are fixed for 5 years. After that the premiums will be adjusted every 5 years. However we are not told by how much the premiums will increase. My worry is that they will bump them up a lot to encourage the holder to give up on the policy and then lose all the money so far invested since it is a WOL policy.

It would certainly make sense that the premiums should increase since with age the chance of dying will increase but it is difficult to evaluate whether it is a reasonable investment if you don't know how much the premiums will go up.

Does anyone have any experience of WOL premiums increasing for a person of that age?

dunstonh

However we are not told by how much the premiums will increase.

If its not investment backed and premiums are guaranteed then they will not increase. If its investment backed then they tend to have a 10 year review point.

It would certainly make sense that the premiums should increase since with age the chance of dying will increase

Only if you went with a yearly renewable whole of life assurance. You wouldnt expect increases otherwise.

but it is difficult to evaluate whether it is a reasonable investment

Its not an investment. Especially if the one the family member is looking to buy has no investment element. However, even if it does, the investment element is not there to make money. It is there to use for future premium costs with the idea being that if they make enough then premiums can be a little cheaper to begin with and not need to increase on review points. However, if they dont make enough then they will increase.

Does anyone have any experience of WOL premiums increasing for a person of that age?

I would think virtually any IFA out there would.

If that is a concern then go with a version that doesnt have an investment element

Can I also ask if the family member is getting advice or doing this off their own back? To arrange a WOL for just £50k to cover a potential IHT bill seems unusual. Does the estate benefit from an increase due to the spouse inclusion? Have future rises in the IHT allowance been taken into account?

D_Dickenson

Thanks for replying Dunston. You are spot on with your analysis.

An IFA has adivised to take out the WOL policy to cover the excess IHT liability after a Discount Gift Trust has been set up.

They have reccommended taking a policy that will build up a little excess to cover late premiums if needed. (is that investment backed?)

I don't believe there is any spousal benefit from taking the WOL policy. I think it was suggested purely to get the IHT down to zero (or at least cover what would need to be paid).

If the IHT allowance was to be increased in the future then I would imagine the WOL policy would no longer be needed so it would be surrendered (with no value?).

So really the question is whether it is worth taking the WOL policy. It seems only to be needed to cover the IHT that would need to be paid to release the estate. I would imagine though it would be fairly easy to arrange a short term bank load to cover this when needed since then the estate would then be released and the bank repaid straight away. Is that correct?

Is there any other benefit from taking the WOL policy?

If the premiums were sure not to increase much then it would seem reasonable value since at £1200 a year it would take 40 years before the premiums exceed the guranteed £50,000 pay out. But if they went up dramatically in 5 or 10 years time then it would appear much less attractive.

Thanks again for any specific or general advice you can offer in this area.

dunstonh

If we look at the £50,000 of cover, then we are looking at paying the excess IHT on £125,000 over the threshold. At £1200 a year it could be good value depending on the age of the individual but it could also end up having no benefit if the allowances increase by the total of £125k over the coming years. If there is or has been a spouse who has not utilised their own nil rate band in full then the reasons for doing this life assurance could be obsolete quite quickly.

The IHT bill is paid from the estate before release so as long as there is cash in the estate to pay it then there would be no need to liquidise any hard assets (such as property). Its only when there is limited cash and the assets are to be passed on without being liquidated that this could be a benefit.

You can get non investment backed whole of life assurance plans with guaranteed premiums. Norwich Union and Legal and General come to mind. Indeed, the NU one allows adjustable payment periods and a single premium option as well as the traditional pay until you die option.

At £100pm for £50k cover on single life, female non smoker that would suggest someone aged around 60 using a guaranteed non investment backed plan payable for a maximum of 30 years. (making £36k the maximum cost).

How old is the individual and is it single life or joint? Obviously the younger the person is, the less attractive that level of premium and sum assured is but if they are older then it can look attractive for the beneficiaries.

D_Dickenson

Thanks for replying again Dunston.

You seem to know the area very well.

I have been looking over the Discounted Gift Trust that has been suggested by the IFA we have seen. It is split over various managed funds with Standard Life totalling £143,000 and I see the commision the IFA will earn is over £10,000 - this seems fairly high to me. The annual charges for managing each fund are well over 2% which again seems high.

Can you give me your opinion on the level of these charges? Is this an area where you could offer similar services or could you recommend someone who could?

dunstonh

I see the commision the IFA will earn is over £10,000 - this seems fairly high to me.

It is. On £143,000 the average commission would be £2574 according to FSA figures (providers report the average commissions taken to the FSA and hte FSA publish these for advisers to use in their menu).

The annual charges for managing each fund are well over 2% which again seems high.

Im not a fan of the Standard Life product. Mainly as the charges on the product make it a mid table offering. Last time SL were coming out top or near top on charges (as in lowest) was about 5 years ago (prior to demutualisation. Currently you would expect Norwich Union or Clerical Medical to come out best although the latter tends to price its product differently with different IFAs so it may be cheaper with some and not others. SL isnt a big commission payer so that cannot be the reason it was chosen. Maybe the IFA just likes SL or their trust is specifically a closer fit for your needs. I mean there is nothing wrong with them. There are a lot worse. Its just not the best. Indeed, you can currently buy the SL bond via Fidelity Funds Network. It is badged as Fidelity but its identical in all other ways apart from Fidelity's version have some extra funds and a special offer running making it better than SL themselves. Although that still doesnt come up on terms with the best priced providers.

Is this an area where you could offer similar services or could you recommend someone who could?

I would think it would be very easy for you to find an IFA that could offer lower terms than that. Either by working in fee basis or customer agreed remuneration (CAR). Fee is when you pay by cheque based on a flat charge or by the hour. CAR is basically the same but is the fee paid for out of the commission with the surplus comission being used to rebate into the plan or reduce charges.

You may wish to approach the IFA and tell him that you have found another IFA that will do it a lot cheaper and see if this IFA would reduce it down. Your target level should be 2% or lower initial commission equiv. A good IFA is worth the cost. However, we are not worth that much. I would also ask a bit more about how SL were researched and the investment spread being used. You would expect at least 8-10 funds with that sort of figure.

D_Dickenson

Again thanks for your opinions on the matters concerned Dunston - your input is much appreciated. I don't know how specific we can be on these boards but if I give as some details from the illustration that seem relevant may be you can give an overall opinion. There are factors like 103.5% of the payment getting invested and also a bonus 0.5% units being added to the fund after year 6 that might make the bond a bit more attractive than it first appears.

I appreciate going in to such detail may be outside the scope of these boards and may be taking up more of your time than is reasonable to expect so please don't feel obligated to reply. The IFA said the individual funds had been recommended by a specialist firm in the city. They seem a reasonable spread of funds so it is more the charges we our concerned by rather than which funds they are. Although thanks for highlighting the alternatives to Standard Life it may well be worth us investigating those further if we can't get a reasonable deal from our IFA.

_____________________________________________________________
Important details from the illustration:

Capital Investment Bond prepared on the Stepped Option.
Your payment: £143,000
We invest: £148,005 (103.5%)

Withdrawals from the bond: £595.83 monthly (5%)
Death benefit: 100.1% of the bond value

Where will my payment be invested?
a) 25% - SL Invesco Perpetual High Income Life 2 fund
b) 10% - Standard Life Investments UK Smaller Cos Life 2
c) 10% - SL Invesco Perpetual Corporate Bond Life 2
d) 10% - SL JPM Natural Resources Bond Life 2 Fund
e) 10% - Standard Life Property Investment Life 2 Fund
f ) 25% - Standard Life Cautious Managed Life 2 Fund
g) 10% - SL Jupiter European Life 2 Fund

What are the annual charges? + (other expenses eg auditors' & trustees' fees)
a) SL Invesco Perpetual High Income Life 2 fund = 2.22% + (0.19%)
b) Standard Life Investments UK Smaller Cos Life 2 = 1.80% + (0.10%)
c) SL Invesco Perpetual Corporate Bond Life 2 = 2.10% + (0.19%)
d) SL JPM Natural Resources Bond Life 2 Fund = 2.25% + (0.13%)
e) Standard Life Property Investment Life 2 Fund = 2.00% + (not given)
f ) Standard Life Cautious Managed Life 2 Fund = 1.50% + (0.01%)
g) SL Jupiter European Life 2 Fund = 2.30% + (0.34%)


Exit penalties for each £1000 paid out
Year 1 - £111.12
Year 2 - £ 86.96
Year 3 - £ 63.83
Year 4 - £ 41.67
Year 5 - £ 20.41
6+ - £ 0.00

Credits to your bond:
From year 6 we add extra units. The value is 0.5% of your funds each year.

How will the charges and expenses affect my investment?
During the first 5 years the effect of deductions is approx £10,000
After 10 years the effect of the deductions will be £26,200

The effect of these deductions will reduce a growth rate of 6.0% to
Year 3 from 6.0% to 3.8%
Year 5 from 6.0% to 4.6%
Year 10 from 6.0% to 4.5%

How much will it cost?
For arranging this bond, we'll pay commission to the Financial Advisor. The commission will be made up of: £10,367.50 immediately. This amount is paid for out of the deductions. If your payment is more than is shown in this illustration then we may pay additional commission.

At the end of the sheet there is an ITakup figure of 7.25% quoted which I think is the percentage the commission is of the investment.
______________________________________________________________________

What would be really useful is knowing what level of deductions would be reasonable to try and get the IFA to agree to.

Using the above charges and fees I make it an overall average deduction of 2.11% (lowest is the Cautious Managed Life 2 Fund at 1.51% highest is Jupiter European at 2.64%).

What should we try and get the 2.11% down to to make it worth going ahead with?

Also are the exit penalties unreasonable?

Again thanks for your help.

dunstonh

There are factors like 103.5% of the payment getting invested and also a bonus 0.5% units being added to the fund after year 6 that might make the bond a bit more attractive than it first appears.

Nice sound bites but the comparison software we have available takes things like that into account. Some providers word things differently.

For example, SL pay a bonus of 0.5% for after year six but Norwich Union (just as example) reduce their annual management charge after year 5. Same thing said a different way. SL are effectively increasing their charges for the first 5 years.

The IFA said the individual funds had been recommended by a specialist firm in the city. They seem a reasonable spread of funds

Its a spread but nothing specialist about it. Its not bad but its nothing special. Every investor and adviser will have their opinions on investing so you will never get the same fund spread recommended. It is certainly not a recommendation from a specialist firm.

At the end of the sheet there is an ITakup figure of 7.25% quoted which I think is the percentage the commission is of the investment

It is. What worries me here is that this is the maximum commission figure and it indemnifies the fund based trail and pays it up front. There will be no renewals or trail commissions so nothing to pay for future servicing. Servicing advisers wouldn't normally take indemnified commission like that. If there was servicing commission it would be around 5% initial plus 0.5% p.a. with no difference in cost or charges on the bond. This also means the adviser has no remuneration which is based on the performance of the investment.

Also are the exit penalties unreasonable?

They are normal. Providers pay money up front with no initial charges but tie you in for 5 years to make up for it.

If you can get the commission down, it can be used to reduce the charges or enhance the investment. A more reasonable commission of £1500-£2000 would see the investment enhanced by £8000 or so. This commission is effectively coming from your investment. So, it pays to get the commission down.

I will repeat that the only thing that really is an issue here is the size of the commission.