Pensioners facing steep increase in their whole-of-life premiums

The Daily Mail has reported this week on the plight of many thousands of people who took out whole-of-life insurance for £10 a month in the 1990s but are facing impossible hikes in their premiums this year.

The design of the policy and the subsequent cost of provision mean that people at 70 years of age are facing significant increases in their monthly premiums. Some are suddenly being expected to pay £100 a month, making continued cover impossible for many.

Whole-of-life policies of this sort are more expensive than the usual term assurance people buy to cover specific costs such as their mortgage or while their children are young. Term assurance runs for a specific period. If you die during that time you receive a payout. If you die after the term finishes you receive nothing.

There are two types of whole-of-life insurance. There are policies which guarantee never to increase your premiums and then there are reviewable ones. The reviewable policies were designed so that in the early years you would pay very little for cover but it was always the case that after ten years the premiums would be revisited, then again at 65, and then every five years after that.

If at any stage the cost of providing the insurance rose, either because of personal circumstances or the performance of the investments, then the premiums would rise too. However, many people were never told that their premiums would ever increase.

According to a report in the Daily Mail, some 270,000 of those who bought the policies are now receiving letters explaining that their premiums are set to rise. Of those, thousands who bought this type of insurance in the early 1990s are also set to get news of a sudden rise in costs.

The difficulty for those facing an impossible increase in costs is that they can’t just cash in the policy, take back the investment returns, and make money from the product, because the performance of many of these policies has been poor, and instead of the thousands people were expecting, they could be left with just hundreds of pounds.

The good news is that customers can complain, first to the insurer and then to the Financial Ombudsman. Last year the Ombudsman saw 1,400 complaints about this type of policy, and the insurer or adviser is found to have been unclear in one third of cases.

In the event that the insurer is cleared, experts recommend customers accepting the losses and, rather than struggle by and potentially face another increase in five years, they should cash the policy in, buy term assurance if they need cover, and look to an ISA if they need some sort of investment.

This case illustrates the constant advice given to consumers when seeking life insurance. Read the small print, shop around for the best deal and, when in doubt, consult independent advice. If a product has been mis-sold then customers can recoup any losses in compensation, but if the customer is at fault for not reading the insurance policy correctly they will be fully liable for any losses incurred.

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