Policy holders who bought ‘whole of life’ insurance cover over ten years ago, could face enormous increases, which might mean that they cannot afford to keep on paying their premiums anymore. The reason is that there are now going to be huge rises in the premiums of these policies, because the cost of providing for them has soared. Around 270,000 people will be affected by the rises in these policies, many of them old aged pensioners. The type of insurance sold was typically by financial advisers or insurance salesmen, and potential clients were told that for a small amount of money each month, usually around £10, when they died their loved ones could get around £10,000.
The £10 per month would be paid by the client, and an equivalent by an investment fund. The client would then receive the £10,000 when they died and as the investment fund would make far more than £10,000, they would receive the rest. However, potential clients were not told that premiums would be reviewed after ten years and would typically increase, sometimes from £10 a month to £50 a month, in order to receive the same amount assured. And the worst news is that policyholders cannot even get their money out of these types of policies by cashing them in, as the money they thought was in the fund has fallen in value. They cannot either refuse to pay the higher premiums, as this would seriously cut the final sum assured, usually by half at least.
It is a terrible scenario for clients to be in, especially as these are the type of people who were organised enough with their future finances and concerned enough about the welfare of their loved ones, to have put in place a policy in the first instance. Now they are having to make a difficult and perhaps financially crippling decision as to whether to pay the higher charges on the premiums, or cash in a worthless policy, despite paying in thousands over the last ten years. Robert Reid, who is an independent financial adviser says, “Don’t expect any excess cash – this type of policy was designed in the Seventies and in almost all cases is not fit for purpose.”
The problem has arisen through years of slow growth on the stock market, meaning that the investment fund has not been performing particularly well enough to meet its demands when the policy ends. And insurers have been too optimistic when predicting potential growth, and misjudging how well these funds would perform, with a typical prediction of 6.25% as the norm, and even as recently as May 2012, they were still predicting a growth of 5.5%. As we all know, the economy is suffering as second double dip recession takes hold and actual growth in the UK has been around 0.9%. Policy holders who receive a letter alerting them to future increases in their premiums should not panic, but take this opportunity to consider whether they actually need the cover now and to think carefully about throwing good money after bad, as these policies will likely to increase even further. Patrick Connolly, who is a financial adviser says, “You may have paid in a lot of premiums, but that money is gone. There may be a more appropriate policy for you out there and if you are looking to save money, you should look to Isas instead.”