This week several media outlets, including the great thisismoney.co.uk, have picked up on an announcement from the Financial Ombudsman Service that increasing numbers of ‘whole-of-life’ insurance policyholders are complaining of sudden increases in premiums that leave them with little choice but to abandon polices at a loss.
Last year the Ombudsman received over 1,400 complaints about whole-of-life policies. With the most common being that unexpected increases in the cost of some whole-of-life policies are forcing customers to abandon the cover at a significant financial loss.
Whole-of-life insurance guarantees a lump sum pay-out when the policy holder dies with monthly premiums invested in a fund. This type of life insurance is typically more expensive than term life assurance because it guarantees to pay out the assured sum at whatever point the policy holder dies, presuming the payments have been kept up, whereas term assurance runs only for a specified period.
There are two types of premiums for the insurance, guaranteed – where the company guarantees to never increase the policy premium – and reviewable, where the company will increase the premium payable at agreed intervals.
If the policy is reviewable then the premiums can and will increase, sometimes significantly. Life insurance premiums are based on such factors as your medical history, dangerous sports or hobbies, whether you smoke and possibly your age.
When premiums are reviewed the insurer will reassess the various factors. Initially, reviewable premiums are usually cheaper. However, over time these premiums will be raised.
The Ombudsman has issues a warning that customers who are unwilling or unable to pay ‘surprise’ increases in premiums are usually left with little choice but to cash in the policy. The only other option is to accept that the policy will provide a smaller lump sum that first expected.
This is a particular problem for older people who would usually struggle to find an insurer willing to cover them. The terms of whole-of-life policies mean that insurers can effectively charge what they like because the policyholders faces losing all cover if they don’t meet the costs.
A source for the Financial Ombudsman Service said: ‘Some consumers take out whole-of-life polices as part of their inheritance tax planning, with the intention of providing a lump sum to cover any tax payable after their death. Often, in the cases we see, consumers find they cannot afford to pay the higher premiums following a review and are faced with having to reduce the lump sum expected.’
In the past, the Ombudsman has called for the Financial Services Authority to investigate so-called ‘whole-of-life’ policies because of the extra costs associated with reviewable contracts.
Insurers said that reviewable-premium policies could still work out cheaper than guaranteed-premium cover.
Guaranteed whole-of-life policies are not necessarily cheaper than reviewable policies. You will often pay more for the guaranteed lump sum. However, this is based on a number of variables, such as life expectancy.’