Am I stuck with my Whole of Life Insurance Policy? A lawyer’s view.

As we move through life we inevitably become concerned with the need to protect the financial future of our loved ones as best we can. There are many ways in which this can be done, whether through investments, setting up trusts or through taking out life insurance.

Setting these investments and polices up can be both intimidating and complex. There is often small print, disclaimers and paperwork to wade through. Ultimately though, a person needs to make sure they are making the right decision.

Those who don’t work in the financial markets, or are not so financially savvy, often seek out advice and help from Independent Financial Advisors (IFAs) and wealth managers. These professionals will offer independent advice to meet an individual’s needs. However, for some reason, when it comes to life insurance, many people try and do it themselves with a view to getting the best deal.

There are a number of different types of Life Insurance policies on the market from Fixed Term through to Whole of Life, however it is important to understand what to expect from each and the potential risks that may be faced.

Am I stuck with my Life Insurance Policy?

As mentioned, the two main types of life insurance are Fixed Term and Whole of Life. Fixed Term is a policy that is taken out for a specific period, in many cases to coincide with a mortgage term or to cover a person’s working lifetime. These policies pay out the sum insured on the event of death to cover the costs of the mortgage or potential earnings. They take into account various factors including a person’s age and health, and the monthly premiums will be set accordingly. Either way, customers will (or should) be shown an illustration of the premiums they will be asked to pay before the policy is taken out.

Whole of Life policies are different. They are taken out to cover the remainder of a person’s life and have traditionally been sold as a set premium with a set pay out.

However, over the last few decades it has become clear that a significant number of Whole of Life Insurance policy holders have had to surrender their policies as they were not aware that their monthly premiums would suddenly increase significantly, therefore becoming too expensive or uneconomical to maintain.

This has left those affected with a tough decision - do I cancel my policy and lose every penny I have paid out until now, or do I agree to keep the original premium payments but get a significantly lower payout at the end?

Whether somebody is a policy holder or an advisor this is a very difficult situation to face.

Traditionally, the majority of people who have taken out Whole of Life insurance policies are attracted to that type of policy as they understand it incorporates a fixed premium. This gives confidence for a number of reasons but most of all because it allows people to budget accordingly – they know what their family will get and how much the policyholder  will have to pay for the rest of their life to achieve that.

On the face of it, this is a fantastic policy for those who want to secure their family’s financial future – ensuring that the pay-out covers potential Inheritance Tax (IHT) liabilities and other expenses as well as leaving loved ones with some legacy of their life. Many advisors will often recommend such Whole of Life policies and as long as the policy holders are given all the details, payment illustrations and understand the small print then this can be a perfect solution.

Sadly, this has not always been the case though. As we have seen, many people took out these policies and they have not delivered.  As such they have now had to cancel them or are struggling to pay the excessive premiums that have increased year-on-year (typically after 10 years from the date they were taken out).

Why has this happened?

Those who have found themselves in this position ask why their insurance provider is acting in such an unethical way? Unfortunately, there is a simple explanation - do the maths!  

The average life expectancy in the UK in 2020 is 80.9. Back in 1990, average life expectancy was 73.7 years. Insurance providers pay close attention to such numbers when setting their premiums.

With a Whole of Life policy, the insurance company knows that they are going to pay the sum insured at some stage in the future. If someone took out a Whole of Life insurance policy on their 50th birthday that was guaranteed to pay out £1m on their death, and they then lived to the average UK age of 81, they would have to have paid enough into their policy to cover this sum. If they had not done so the insurance company would make a loss. 

Some insurance providers have sold whole of life insurance products that start with a premium that is too low at the outset to pay for the full amount of life cover. This was done to entice customers to take them out.

For example, without considering any associated investment an insurance company may make, if a policyholder has a starting premium of £150 a month for a £1m policy, for the next 31 years they would still only pay just short of £56,000 during their lifetime - leaving a huge financial loss for the insurance providers. Even if you double, triple, or quadruple that monthly premium, it is still going to leave a huge shortfall. So, the providers are trying to mitigate their own financial risk.

What this doesn’t take into account though is that insurance policies which are designed to increase in price leave people without the security they contracted for, but also without the ability to find that security elsewhere on similar terms. Those affected are therefore left high and dry without any insurance cover, through no fault of their own. In exchange, the insurance company retains the profit it has already made from the premiums on a policy that has to be cancelled (perhaps 10, 20, or even 30+ years after it was taken out).

What do I do if this has happened to me?

Sadly, many people who have faced this issue feel stuck between a rock and a hard place. They have gone back to their IFA or Wealth Manager and in truth, there is little they can do except try and move them to a different type of policy.

Hence, many of these policy holders have had to cancel their policy, losing all the money they have paid in over the years, and leaving their loved ones without any financial benefit.

Their alternative is to continue to pay the ever-increasing premiums, putting themselves under financial pressure with no clear idea of when increases will end (as they don't know when they will die or when it will become completely unaffordable so they can’t carry on paying).

However, organisations like WLI Claims are now able to help. We have a team of insurance, corporate, professional negligence and litigation solicitors who have extensive experience in this area and have identified significant mis-selling by Whole of Life Insurance providers.

WLI Claims understand that it is not easy to take on the life insurance companies on your own. It can become costly and take a long time. Regardless of the size of your policy, WLI Claims can help you and you could be due the tens, if not hundreds of thousands of pounds you deserve in compensation. That money could help secure your family and loved one’s financial future in a way that was expected when the policy was taken out in the first place.

Speak to your IFA or wealth advisor as they should be able to offer you the advice you need to help you. Alternatively, get in touch with WLI Claims direct through our website because all is not lost and there may now be a solution.

By Karl Cameron, Head of Legal