Whole Of Life Insurance Loophole That’s Slashing Thousands From Policies
It’s no secret that the insurance industry is a hotbed for complaints.
Complex policies, high commissions to sales agents and little understood about how the industry works leaves only one winner – the insurance company.
Consumers are supposed to be investing in their family’s future by taking out insurance to cover mortgage expenses, funeral costs, and living costs for the family and in some cases, for inheritance tax planning too.
However, revelations appearing in recent media coverage are bringing the industry into upheaval as more consumers are receiving letters from their insurers, notifying them that the level of cover they have in place is being slashed.
In one case, the cover reduction was from £113,500 to £36,950, and apparently that’s only the tip of the iceberg.
In the past six years, the Financial Ombudsman has received nearly ten thousand complaints about whole-of-life cover, and only 55% have been found in favour of the consumer.
As they state on their website:
“We will not uphold a complaint just because the consumer was asked for more money – or was told they will have to accept a reduced sum assured.”
The rest, they say is due to consumers not understanding what they were agreeing to when they took out the policy.
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The danger to look out for…
When you take out any insurance policy, you need to sign the agreement stating you understand what you’re entering into. The part within whole-of-life cover that you need to be wary of is the review periods.
These are investment products and as such are performance based. If your insurer invests their funds poorly, you can expect a poor performing policy. That’s indicated on the policy as “the value of your policy may go up or down” or similar wording.
The other wording that will alert you to the possible risk is the review period terms. Many are five, ten, fifteen, or twenty year terms. This will be indicated by stating that your policy will be periodically reviewed. It’s clear now what that wording means, given the amount of policies being slashed.
If you have a whole-of-life insurance policy that’s under periodic review, you can expect to be getting a nasty letter notifying you that your level of cover will be reduced. The main insurer reported to for major slash backs on policies are Sun Life of Canada, who operate within the UK.
What’s also brought to light in the media report is that cuts of up to 50% are not unusual industry wide. Therefore, you can take from that, when you take your policy out, the value of it at time of purchase isn’t worth the paper it’s printed on because by the time of maturity, it’s likely to be cut anyway.
What the Ombudsman can do
If you feel duped by your insurer, there’s not much hope. The letters being sent out are for policies taken out two decades ago, which is way past the time line you have for complaining.
From the time you take your policy out, you have six years to approach the ombudsman for assistance. Within three years of a problem arising, you’ll get some help too. However, by the time the insurance firms get around to slashing your policy value, you’ll be way beyond the three or six years, so you’re pretty much at the mercy of the insurer.
Once you’ve signed on the dotted line, they can change your policy amount at any time following a periodic review of your policy, which is stated within the terms you agree to when you sign to accept your policy offer.
Which insurance policy is best going forward?
Advisors are claiming simple is best. It’s the most affordable and doesn’t come with review periods attached.
There are some insurers, such as Royal London that offer guaranteed insurance policies, although they do still sell reviewable policies, claiming the majority of reviewable policy holders are older.
Also worth noting is that reviewable policies offer high levels of cover with low monthly payments, so if you’re quoted a super attractive premium for a policy, take that as a red flag that you’re entering into a reviewable policy and the sum insured may half as it approaches maturity.
What you can do if your policy slashes
Increase your premiums is all you can do. Especially if your policy is decades old and you’ve since developed any health conditions, such as high cholesterol or blood pressure. Instead of starting afresh, your insurer will give you the option to pay more to top up your premiums and the value of your policy.
That’s pretty much all you can do, unless you’re still in good health and confident you can get a better deal elsewhere.
Otherwise, you’ll have to cough up first to get your insurer to cough up later.
Sad but true.