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Black whole?

As Berkeley Berry Birch’s network subsidiary Berkeley Independent Advisers faces FSA scrutiny over the suitability of the sale of wholeof-life plans, advisers are questioning the future of the oftenmaligned product and it may not be bright.

Whole of life is seen as far more complicated than term insurance and many advisers believe it needs a complete overhaul if it is to continue to be sold as a valid means of protection.

The latter half of 2004 saw it suffer an onslaught of bad press as, on top of the FSA investigation of BIA, the Fin-ancial Ombudsman Service reported a sudden rise in complaints about the product in September.

The FOS found that complaints were increasing where whole-of-life insurance products were sold without clients being told that policies would be reviewed.

Whole-of-life policies sold on a maximum cover basis do not fix the premiums paid for the life of the policy so every 10 years or so the life insurer has the right to increase the premium or reduce the benefits when the policyholder dies.

The FOS is looking at the complaints to see if firms made it clear at the time of sale that there would be reviews.

It says: “Depending on the particular facts of the complaint, it will not always be sufficient for the firm merely to say that it mentioned the potential for review in its product literature so we may uphold complaints where the possible effects of plan reviews are not, in our view, made sufficiently clear or given sufficient prominence.”

Bright Grey products director Roger Edwards says: “Whole-of-life plans have not been sold as much as they used to be because the majority of protection product development has been on the term insurance side.

“The vast majority of wholeof-life plans were written on a maximum cover basis, where premiums usually go up massively after 10 years and every five years after that. The majority of plans are now coming up to their first review and problems may start to emerge if customers did not understand what they were buying.”

BIA group finance director Craig Butcher says: “We are taking the issue seriously and are putting a lot of resources into our review. Our aim is to ensure that we operate to the highest standards across the group and within the network.”

The network is being inv-estigated over the suitability of 3,150 sales of whole-of-life and regular savings plans bet-ween December 1, 2001 and September 27, 2004. It has suspended sales of the products pending analysis and review of the issues that the regulator has raised and says it is co-operating fully with the FSA.

IFAs are pretty sure this is only the tip of the iceberg for whole-of-life plans and are fairly certain that more problems are going to emerge.

Life Policies Direct managing director Jason King says: “Whole of life is a product we have always steered clear of. Its investment elements can cause problems down the line and require advisers to have a good knowledge of investment as well as protection. I think there will be more trouble emerging.”

If Edwards is right and the majority of whole-of-life policies sold on a maximum cover basis are approaching their 10year reviews, the market could be in for a bit of a shock. The FOS revelation about increasing complaints only serves to back up this assumption.

Bloomsbury Financial Planning managing director Jason Butler does not believe the problem only lies with the product. He says he has heard of sales meeting where advisers were urged to sell whole-of-life policies to generate vast amounts of commission.

He says: “I have heard rep-orts of questionable sales processes going on. One adv-iser apparently earned £40,000 on the sale of one contract.”

But he also has strict guidelines about where a whole-of-life product is suitable. He says: “The only basis whole of life should ever be sold on is to provide sufficient cash on second death to meet inheritance tax requirements. There is a problem with whole of life when it is used as a savings vehicle.”

But not all believe this is the end of the road for whole of life. Direct Life & Pensions sales and marketing manager Richard Verdin says: “Whole of life is a valid product but its problem is that it has always mixed insurance with investment.”

Verdin believes whole of life needs a complete overhaul and says one or two innovative providers are starting to dev-elop products without investment elements.

For example, Legal & General recently launched a wholeof-life protection plan without investment elements which guarantees premiums for the life of the policy, only increasing the premium if the level of cover is increased.

Edwards says the only reason that term insurance has been taking over from whole of life is because it is so much easier for the consumer to understand. If more innovative and simpler products are starting to emerge on the whole of life side, then it could start to enjoy a sudden boost in popularity.

There could also be a shift in the market as the menu is introduced by advisers over the next six months – whole-of-life products do come within the menu due to their investment element but term insurance does not.

Edwards says: “The main stumbling block for whole of life is if the consumer was properly informed of potential inc-reases in premiums or not. Those who were not made fully aware are those who are complaining now – but the product itself and the protection it offers are very good.”

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