PEOPLE with reviewable premium life insurance need to check and understand their policies to avoid being surprised by potentially crippling increases in premiums as they grow older.
The warning comes from an independent financial adviser who has won a four-year battle for the first half of £31,000 of compensation due to an 85-year-old client, and who said that at least one provider is “jacking up premiums to an unaffordable level”.
Diane Carr Morris of Edinburgh-based Crosbie Carr Morris is still waiting for the full compensation pay-out due to retired nurse Mrs C Gibson despite the Financial Ombudsman Service finding in the client’s favour in September 2016.
A verdict of misselling followed nearly two years during which the complaint was passed between the Financial Services Compensation Scheme and the Financial Ombudsman Service.
Mrs Gibson was 70 when she was sold a whole of life ‘maximum cover’ policy in 2004 by a firm that is no longer in business.
She claims that neither the adviser nor the insurer gave any warning that the premiums were likely to rise by nearly 100 per cent at the product’s first review in 2014.
Ms Carr Morris said that as it is “commonly known by advisers that maximum cover premiums are likely to double every 10 years” these products are only suitable for people whose income is expected to rise.
Edinburgh pensioner Mrs Gibson, on the other hand, could only just afford the initial cost of £5,198.
When the insurer sent Mrs Gibson her 10-year review notice, which showed the premium rising to £9,832, it did not also issue a warning that the cost would rise steeply again within another five years.
It also sent the review five months late, leaving no time for the option of cancelling the policy before eleventh year mortality premiums of almost £7,000 had been taken.
Ms Carr Morris said that Mrs Gibson had been offered no alternative options in 2004 that would have been more suitable, nor any alternative plans from other providers. She said her client had also been unaware that the adviser received £3,700 in commission, with more to come.
In 2004, the real cost of supporting £300,000 of cover, which was intended to help offset future inheritance tax, would have been a guaranteed premium policy costing £7,461 a year for a 25-year term only, or £8,661 a year for life – far more than Mrs Gibson could have afforded.
In a second case, another insurer has told an elderly Fife-based couple, both aged 78, that their current annual premium of £2,145 a year will rocket to £9,641 in five years’ time, a rise of 350%. The premiums will then rise to £22,013 in 2028 and £35,216 in 2033.
Provider Old Mutual Wealth (formerly Skandia Life) told the couple that its revised rates were based on “the likelihood of a claim being made by the people covered”.
Ms Carr Morris said that such wording suggests that companies set their premiums in the expectation that policies will lapse before any claims are made.
Indeed, an insurance industry blog in the US has revealed that only 15% to 20% of whole of life policies actually pay out, with the majority lapsing with at best a modest surrender value. If the couple from Fife had surrendered their policy last year, for example, they would have received under £16,000, having paid premiums of £20,634 over 20 years. If the policy ran until 2033, total premiums would have added up to over £169,000 for life cover of only £161,000.
Ms Carr Morris said: “There is no way these clients can afford this cover. But they can’t surrender and take out a guaranteed premium whole of life because one of them is now uninsurable.
“Insurers who behave in this way are severely remiss in their policyholder care by jacking up premiums to such an unaffordable level that policyholders are left with no viable options.”
A spokesperson for Old Mutual Wealth Life Assurance defended the practice of increasing premiums, noting that the price hikes are linked to mortality expectations.
“Premium rates for this plan are revised periodically to reflect that cost of providing life cover increases sharply with age,” the spokesperson said.
“We have recently reviewed our life cover charges on the product to ensure they are in line with latest mortality expectations. The product offers flexibility that enables our customers to vary the level of cover according to need and affordability over a long period. We write to our customers every year with details of their policy, its sustainability and the options they have available.”
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