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FOS raises concerns over whole of life policies- Update with additional stats

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The Financial Ombudsman Service has raised concerns about the levels of complaints it is receiving about reviewable whole of life policies.

In a comment piece in the Daily Telegraph, Financial Ombudsman Service lead ombudsman for investments Caroline Mitchell says the FOS received about 1,400 complaints about whole of life policies last year. Out of these, 33 per cent were upheld.

The FOS received 1,690 complaints about whole of life policies during 2009/10, 28 per cent of which were upheld.

Mitchell says many consumers complained that it was not made clear to them when they took out the policy that their premiums would be reviewed and could increase significantly after a set period of time.

Mitchell adds: “We expect businesses that sell reviewable whole of life policies to explain clearly that these policies are subject to review – and to point out the effect that any review might have on a consumer’s future premiums.”

She also says that a small number of complaints revolved around whole of life policies taken out for inheritance tax planning that had not been put in trust for the beneficiaries of the estate. She says the FOS would expect the business selling the policy to create the trust or to check if the policyholder has made their own arrangements for this to be done.

The Telegraph reports the anger of readers who have recently seen their premiums increase significantly with some being forced to settle for far lower policy benefits.

The FOS says it is unable to provide a breakdown for which distribution channel accounts for the most complaints about whole of life policies. However, last year complaints about whole of life policies and savings and endowment products accounted for 21 per cent of total investment complaints.

Overall 44 per cent of investment complaints last year were made against life insurance and investment product providers. A further 21 per cent of investment complaints were made against banks, and 14 per cent were against IFAs.

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Readers' comments (23)

  • While this may be true, the product providers must accept some of the blame here. Some of the reviewable premium products have seen increases which many advisers could not have anticipated. And of course the KFDs did point out that premiums would increase so consumers should be aware of this. Skandia Protect is but one example of a poor product. Some of the increases are out of all proportion to the likelihood of increased mortality (underwriting) rates at renewal and smack of trying to make money out of existing clients. Like Halifax Gold accounts, a nice incentive and then milk the consumer on the basis of they are unlikely to move (client inertia).
    Not putting a policy in trust is unforgiveable.
    Finally WOL policies require reviewing annually - many consumers do not wish to do this and are now finding out the consequences of not doing so in spite of being recommended to do so. We do not put that in our letters without reason!

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  • Every adviser I ever dealt with always stressed the importance of understanding the reviewable nature of this plan, those clients that wanted suriety didn't take these plans out.

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  • Of the 1,400 complaints it would have been more appropriate to mention how many of these complaints were upheld. We are in a culture of " Lets Sue" " No win No Fee" etc. The details are always in the KFI. If one takes out an Insurance Policy then one should read ALL of the small print. What happened to "Let the buyer beware"? Once again it appears that the Adviser is being blamed for doing his job in the best interests of his client, whilst the product provider, often a Bank subsiduary, gets off scot free.

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  • If a claimant says 'I didn't understand the risk' the FOS will inaviably find in his/her favour.

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  • Eleanor Downie FCII and I raised this qustion 12 months ago. We carried out some basic research accross several companies and found a wide diversity of approach by insurers.

    Regulatory and statutory constraints work against guarunteed products (fixed sum assured/ fixed premium with accumulating surrender values) and yet provide little guidance for underwriters. The difference in treatment of published and what now appear to be increasingly popular 'annual' reviews.

    There is no doubt in our minds that certain life companies are milking the system and effectivly 'dumping' older lives in order to improve their balance sheets from increased premium income and reduced risk.

    The regulator knows and ignores the symptoms and the disease.

    It has to be stated, clearly, that some companies not only honour their contract terms but communicate effectively and in the life assured's best interests.

    The whole of Life assurance market requires a sensible detailed appraisel before yet more damage is done to a very important sectore of the life assurance industry. Asset stripping comes in many forms.

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  • I would alos be interested to hear where the original advice was given. Either from IFA or as I suspect from the bank assurance world where the importance of getting the policy on "risk" first and then sort out the trust afterwards may be part of the problem.
    A maximum cover reviewable WOL policy is no more than a 10 year term policy with an option to renew and unless used in that context should not be included in IHT planning

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  • Might be good to know how many of the life companies are still open to new business or are closed companies maxing out returns from a closed life company

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  • Whilst I agree with the comments made above, it is perhaps worth mentioning that many WoL contracts these days are based on fixed-for-life premiums with no periodic review and, quite often, they're hardly any more expensive than their reviewable counterparts, if at all.

    The worst case I've seen of an insurer hiking the premium at the review date is Prudential, who more than doubled it because the underlying funds had failed to achieve the required hurdle growth rate of 6% p.a. By how much they declined to disclose (my guess is not by much), though obviously they saw it as an easy opportunity to fleece or dump the clients and took full advantage accordingly. It's practices like that which give us all a bad name and constitutes yet another example of why I try to avoid recommending Prudential, amongst others, whenever possible.

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  • These "flexible" Whole Life policies have been a problem since they started in the early 1980's.

    It goes beyond the hugely increased premiums charged at review date, although that is bad enough.

    Just to make sure that the client has little alternative to pay the charges, many have exorbitant surrender penalties. One of the first, the Skandia Permanent Protection Plan still makes a surrender charge at age 106!!!!

    Often the client has only three choices, of which only the first, expensive, option enables the plan to perform its original function: 1. Pay the higher premium to keep the sum assured.
    2. Reduce the sum assured to maintain the premium (hardly satisfactory), or
    3. Make the plan "paid up" with the original or a reduced sum assured (again not satisfactory).

    Not surprisingly, the high and continuing surrender charge means that whichever the client chooses, the insurance company wins.

    Sam Caunt is correct when he says these products, like the Halifax Gold account, "milk the consumers", except for one thing: the surrender charges mean the insurers have even covered-off the inertia option.

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  • I always give the client the option of either maximum cover or balanced cover when considering Flexible Whole of Life and explain that with balanced cover the premium will be intioally higher than maximum cover but may not be subjected to hikes in premiums at the review dates. When however they see the difference between the premiums for balanced versus maximum cover the client in 99% of cases will alaways select maximum cover as the monthly/annual premiums are typically 5 time lower than Balanced cover. It doesnt matter how much information you give a client to explain the benefits of balanced cover it always comes down to price!!!!

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