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, the financial ombudsman has warned.
Last year the Financial Ombudsman Service received over 1,400 complaints about whole-of-life policies.
Whole-of-life insurance guarantees a lump sum pay-out when the policy holder dies with monthly premiums invested into a fund.
Whole-of-life insurance is typically more expensive than term life assurance because it guarantees to pay out the sum assured when the policy holder dies, at whatever time, as long as the payment have been maintained, whereas term assurance runs for a specified period.
LIFE INSURANCEWHOLE-OF-LIFE COVER: Life cover and investment rolled into one. Monthly premiums invested in an investment fund with any pay-out dependent on fund's performance. Cover is usually expensive and premiums can increase alarmingly just to maintain same level of cover.
LEVEL TERM LIFE INSURANCE (OR ASSURANCE): Pays lump sum on death with amount set at the policy's outset. Premiums usually guaranteed from outset.
DECREASING TERM INSURANCE (OR ASSURANCE): Pays lump sum on death but amount decreases over the policy's term. Typically bought alongside repayment mortgage with the sum assured decreasing as the mortgage debt reduces.
INCREASING (OR INDEXED) TERM INSURANCE (OR ASSURANCE): Sum assured increases each year without the need to have a medical. Premiums also rise.
But sudden increases in the cost of some whole-of-life policies are leaving customers with little choice but to abandon the cover at a significant financial loss.
There are two types of premiums for the insurance, guaranteed - where the company promises to never increase your policy premium - and reviewable - where the company will look at your policy to assess the premium you pay at agreed intervals.
If the policy is reviewable then the premiums can increase – sometimes significantly. Life insurance premiums are based on things such as your medical history, dangerous sports or hobbies and whether you smoke.
When your premiums are reviewed the insurer will look at all these aspects anew to reassess what you pay.
Initially, reviewable premiums are usually cheaper. However, over time these premiums may be raised.
The Ombudsman has warned 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 is they refuse to meet the costs.
Caroline Mitchell, from 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 can not 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.
Nick Kirwan, assistant director, Health and Protection ABI, said: '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.'
HOW TO CUT THE COST OF LIFE INSURANCEYou can pick up life insurance from the shelves of your local supermarket, via price comparison websites as well as the traditional insurance broker or financial adviser.
Traditionally it was cheaper to use a traditional insurance broker or a financial adviser but there are a new breed of brokers are far cheaper than traditional ones.
Brokers are usually paid commission by the insurance company and this is added onto your monthly policy premium. However, some people may prefer to deal with an expert adviser who can warn on the pitfalls of picking the wrong policy.
Some brokers are now willing to charge a flat fee instead of commission and help make your policy cheaper.
This fee option is great if your situation is uncomplicated and you just want to buy basic term assurance.
For more information read our guide to getting life insurance.