Key Post Insurance company increasing premium on unit-linked, whole of life policies

Brendan Burgess

Brendan Burgess

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Thanks to mercman for suggesting a Key Post on this topic. I have no practical experience of these products, and so would welcome any corrections or comments.

Liam Ferguson has written an excellent article on his blog why you should not touch these policies with a barge pole, (even if we have to make an exception to the Askaboutmone prohibition on bad language to link to it).

Reviewable (me) Whole of Life

But, what should I do if I already have one?

What do you do if the life company writes to you and tells you that they are increasing your premium from €50 a month to €350 per month?

The first thing to do is to check whether you need the life cover or not. If you have no dependents or if you have life cover elsewhere, you may not need to life cover. Then you can cancel it and convert the policy into a savings policy.

If you do need the life cover, then get a quotation for life cover separately. You may need it for mortgage protection. But get a quotation for reducing term insurance. This is the cheapest. As the premium level will be fixed, it should work out cheaper than the insurance "bundled" with the whole of life cover.

If you have become an incrased risk through illness, then the cover with the whole of life policy may be worth keeping and paying for.

Should you cash the unit-linked policy?
This is not easy to answer. Maybe ask a financial advisor to review it for you. If you are saving anyway and the charges are reasonable, then maybe keep the policy as a savings policy.

If the charges are high, as they probably are, then cash it in.

While a Financial Advisor may give you good advice, some will automatically tell you to cash it in and take out a new policy, so that they get another lash of commissions. Only deal with a financial advisor who will work for you on a fee basis, so that they will act in your best interest, not theirs.
 
Can you object to the increase in premiums?

Usually, you can't as the policy is clear, but twofor1 appealed against the increase and the Ombudsman upheld his complaint because the company had written to him telling him that they would not increase beyond inflation. Read his very interesting story here:

Successful case against Aviva on unit linked whole of life policy

While the Irish Financial Services Ombudsman does not explain his approach to these issues, the UK FSO has issued a very useful technical note on the criteria he uses to assess a complaint.

Online Technical Resource for Whole of Life Policies
 
Some stats for you:

Probabilities of dying

Decade Male Female
20's 1.01% 0.32%
30's 1.08% 0.5%
40's 2.18% 1.43%
50's 5.37% 3.19%
60's 13.84% 8.82%
70's 35.91% 22.97%

When your unit linked policy is reviewed, it is reviewed with the increased probability of you actually dying. Add in the fund side of the plan is exposed to market fluctuations, you are leaving yourself wide open to big increases if there is a bear market.

When you take out life cover, you want certainty. Certainty that the policy will pay out and it will pay the amount you want. While unit linked plans are very cheap initially, they are very expensive in later life and that can remove the certainty of payout as you may need to reduce the cover to what you can afford and not what you need.


Steven
www.bluewaterfp.ie
 
Michael McGrath has called for the Ombudsman to review these policies

Ombudsman must review sale of whole of life assurance policies – FF


- Six year rule for complaints to financial services ombudsman must change -

Fianna Fáil Finance spokesperson Michael McGrath has expressed concern over possible mis-selling of whole of life assurance. These are policies where customers purchase cover that provides a lump sum in the event of their death as well as purchasing units in an investment fund. The policies typically have a premium review clause after an initial 10 year period and then each subsequent 5 years up to age 70 and annually thereafter.

Deputy McGrath stated, “People have been shocked to find that, when the review takes place, the premium can, in some circumstances, be increased by 100% or more. In many instances, it is apparent that it was not made clear to customers at the time they first took out the policy that they could be subject to massive increases in the monthly cost. Customers are then faced with the dilemma of whether to pay the higher premium or cancel the policy and forego the benefit of the premia they have already paid. They may end up with inadequate or no life assurance coverage at all."

“The Financial Services Ombudsman (FSO) has recently completed a review of the sale of payment protection insurance policies and found massive irregularities. This has resulted in compensation payments to many customers who were sold unsuitable products. I believe a similar review is needed of the sale of whole of life assurance policies to ensure that customers are fully informed of the product they are purchasing and, where this has not happened, that appropriate sanctions are put in place. However, there is also a need for a change in the law in relation to time period in which customers can make complaints to the FSO.

“One of the shortcomings of the investigation of the sale of payment protection insurance was that it only covered those policies sold after the Consumer Protection Code came into full effect in July 2007. This means that many people have lost out if they became aware of the potential mis-selling more than six years after they initially took out the policy. I believe that thousands of people may have lost out on compensation as a result of this rule. In fact a UK company Stanton Fisher, which handles PPI claims, has described the scale of mis-selling as being potentially the "biggest financial scandal in Irish history.

"The long term nature of many financial products - including whole of life assurance, payment protection insurance policies and endowment mortgages - means that problems often only emerge well beyond the six year limit. It is grossly unfair that these consumers are being prevented from having their case heard by the FSO. The result of the rule is also that financial services firms who have mis-sold products to unsuspecting consumers can continue to get off scot free.

"Last year, Fianna Fáil published a Bill to deal with this issue. The Bill proposes that, from the time a person becomes aware of a problem with the financial product, they would have three years to lodge a complaint with the FSO. We are calling on the government to make the necessary change in the legislation to deal with this injustice currently being experienced by thousands of consumers of financial products.”
 
Mr Mc Grath is doing good work on getting consumers an opportunity of recompense on (fraud/lack of ethics) on sale of Financial Products.

By changing the Statute of Limitations from the present that you cannot complain of products sold more than 6 years ago , to being able to complain 3 years from when customer realises you may have been conned is a Huge game changer.

eg; on ppi ( i have an interest);
In uk PPI payouts are now at Euro 28 Billion and rising.It took 4 years to get to this.
In Ire equivalent is Euro 2.5 Billion, as things stand, Banks have paid out circa 400 million.
With Mr Mc Graths proposed change to statute of limitations and ongoing heavy legal cases , I expect Banks to take a large hit in 2015.

Maybe it is just (me) but I believe that sorting and having to provide for PPI and other financial mis-selling will only be made after the stress tests?
It is informative to note that Law Reform Comm had previously recommended this , yet our Government has not taken Law Reform Comm, s advice?

PPI may well be a biggie , but selling long term policies to old people was from my view a nastier product sell.I also would think the whole way Banks muscled unethically into all insurance type products will eventually cost them dear.
 
Joe Duffy has covered this subject several times over the years but it was Irish Life's turn in the spot light over the last couple of days

[broken link removed]


I was not involved in the selling of reviewable WOL policies however I have been dealing with the fallout from them for the last 8 years!

I don't think mis-selling was the biggest issue with these policies by the seller that is, I think the problem is that the companies did not make the sellers aware or did not put enough emphasis on the potential for the policy to be reviewed or even perhaps did not anticipate that this would be an issue in years to come.

When reviewable WOL policies were "invented" (I use this word with contempt), Life Insurance actuaries devised a product that was a cross between a Life Insurance Policy and an Investment Policy.

As a quick example...you pay 100e for 100,000e of life cover, under a reviewable policy in the early years 60e might be the cost of the life cover and 40e would be invested in a unit linked managed fund. So the fund grows and grows over the years? However as you get older every year the cost of the life cover increases so after 10 years the cost of the life cover may have increased beyond the 100e premium you were paying. So if the cost of cover is 110e on year 11, then the difference between the premium you were paying and the actual cost of the life cover is deducted from the fund.

For those that is old enough to remember or who have an interest in the recession of the 1980's, inflation was over 21%, interest rates peaked at 23% and income tax marginal tax peaked at 62%. With this in mind returns on managed funds were over 20%pa.

So the Actuaries thought that it would be prudent to use a lower level of investment return just in case! So Life Companies though that Managed Fund would comfortably provide a return of 14%p.a. This return would help grow the investment fund faster than what the cost of life cover annual increase. So in theory there should never have been any need for a policy premium review.

Now the Actuaries are not idiots and created their own little insurance policy in the Customers Policy, to protect the Insurance Company should the unit linked fund not produce the return of 14% as expected and inserted a clause in the T&C's that they have the right to review the policy every 5 to 6 years and check that the insured is paying the correct premium. (Just in case that investment returns would not be as high as they predict in the future)

So what went wrong?

So as we all know unit linked funds never provided returns like this on a consistent basis as interest rates and inflation have been steadily falling for the last 30 years and thus Managed Funds returns have fallen also and have only returned 6% p.a. at best over a 10 year rolling basis. So the managed fund did not grow as fast as the cost of life cover increases as we get older and now the managed fund is depleting at a much earlier and faster rate than what the Actuaries though back in the early 80's and now the unit linked policy has "Bombed Out" and there is no money/fund left!

So now the people that took out these policies 30 odd years ago are now in their 60's and probably heading into retirement on much reduced income and then they get this letter out of the blue demanding premium increases or reduction in benefits, is it any wonder people are up in arms over this!

So perhaps people should not blame the seller or advisor as I don't think they ever realized that this could happen.

So who should I blame?

You don't need me to tell you that one do you!!! However there may be more than the life insurance companies to blame here...

A complaint was made to the FSO or the equivalent back in 2001 or 2002 as this was about the time that insurance companies started sending out premium reviews on an increasing basis. The complaint was about an Insurance company offering to replace the unit linked WOL policy with a 10 year premium reviewable non unit linked policy without medical evidence, the rates they were charging were in line with standard term insurance rates. I forget the exact detail of the complaint but the FSO basically (forgive the language for a moment Brendan) screwed the consumer in its ruling!

They ruled that the insurance company were not obliged in any way to offer this product as the terms of the unit linked WOL were very clear in that they had the right to increase the premium at 5 year intervals. The insurance company promptly with drew this product straight away. So much for the FSO protecting consumers!?
 
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