Making up just below 20 per cent of the life insurance market, whole of life (WOL) is traditionally used to support inheritance tax planning or to provide a lump sum to cover funeral costs. But, with its track record of innovation in other areas of the health insurance and protection market, VitalityLife is looking to turn WOL into a viable alternative to term assurance.
In February it launched two new WOL products, Interest Rate Optimiser and Premium Optimiser, each designed to make cover more affordable for younger lives. “WOL is an undervalued product,” says Deepak Jobanputra, deputy chief executive of VitalityLife. “Unlike term assurance, where you pay your premiums and cover is gone at the end of the term, with WOL, as long as you keep up with your premiums, it is guaranteed to pay out.”
Need for WOL
The insurer also believes the changing demographics in the UK mean there is more demand for this open-ended form of life insurance. Alongside increases in life expectancy, the removal of the default retirement age means that more and more of us are working beyond age 65, with the latest figures from the Department for Work and Pensions showing that more than 1.1m over-65s were still in work in July 2014.
These extended working years, coupled with the need for a chunkier deposit to get on the property ladder, also mean that mortgages are being stretched further too. Subsequently, although it was common to ditch borrowers by the time they reached age 65, a growing number of lenders will now consider older people with some of the smaller building societies accepting customers well into their 80s.
With debts potentially extending long beyond age 65, a WOL plan can be a much more suitable product. “We have clients who take out a 30- or 40-year term assurance policy, but a WOL plan would suit their needs much better,” explains Rob May, director and head of broking at John Lamb Insurance Broking. “Unfortunately it is usually the cost that puts them off.”
Guaranteeing a payout means premiums can be as much as three to four times more expensive than opting for a term assurance product. As an example, figures from LifeSearch show how the two types of cover stack up price wise. A 35-year-old non-smoker taking out £150,000 of term assurance to age 90 would pay £21.36 a month with Scottish Widows. Opt for a WOL policy for the same sum assured and the monthly premium would increase more than threefold to £67.59, again with Scottish Widows.
The difference reduces for older ages and for people who smoke, but WOL still remains prohibitively more expensive. For example, a 45-year-old non-smoker taking out the same amount of cover to age 90 would pay £43.24 with Royal London, or £104.46 for the WOL equivalent with Scottish Widows. If they smoke, the equivalent monthly premiums would be £84.06 with Legal & General for term assurance and £149.74 for WOL with Old Mutual.
New designs
To bring premiums closer together and make WOL a viable option for younger ages, VitalityLife offers an upfront premium discount of up to 67 per cent, depending on age, where customers take out either the Interest Rate Optimiser or the Premium Optimiser with its healthy living programme. Premiums then increase each year, with the two products passing on these increases in slightly different ways.
The Interest Rate Optimiser is designed to enable policyholders to share in the upside from future interest rate rises. As life insurers invest their capital to support future claims, higher interest rates mean better returns and therefore lower premiums. Therefore, if long-term interest rates rise, premium increases will be smaller and in some instances disappear altogether.
For example, if the long term interest rate – it uses the Bank of England’s 20-year rate – remains below 2 per cent, premiums will increase by between 1.7 per cent and 4.8 per cent depending on how engaged the policyholder is with the healthy living programme. If the rate hits 6 per cent or more, the increase will be up to 3 per cent, with the healthiest policyholders seeing their premiums frozen.
The Premium Optimiser plan is a simpler concept with the annual premium increase dependent on the status gained through the healthy living programme. This means that policyholders will see their premium increase by anything from 1.5 per cent a year if they gain platinum status to 4.6 per cent if they go for the lowest level – bronze.
Although there is a fair amount of number crunching to contemplate, giving such a chunky upfront discount does mean that premiums stack up well.
For example, take a policyholder aged 45 next birthday. Taking out Vitality Life’s standard WOL plan would cost £54.50 a month, but if they went for the Premium Optimiser, premiums would start at £19.80.
If they qualified for the platinum status on the healthy living programme, premiums would increase by 1.5 per cent a year, but they would still be paying less – at £53.69 a month compared to £72.87 – when they reached 100 years old.
Even if they did not engage much with the healthy living programme and only achieved bronze status, it would still take until they were in their early 70s before the monthly cost of cover exceeded that for a standard plan. Furthermore, the cumulative cost of cover for the Premium Optimiser plan would only start to exceed the standard WOL plan by the time they reached age 90.
Adviser reaction
Delivering innovation in what is often regarded as a staid market has been well received by the adviser community. Emma Thomson, life office relations director at LifeSearch, says that although advice will be essential due to the pricing complexities of these products, she can see a market for them. “They will definitely suit people who buy into the healthy living programme. As well as helping to keep their premiums affordable, this gives them additional benefits such as cinema tickets and discounted gym membership,” she explains.
Discount and protection
In addition, while the golden rule for WOL is to take a guaranteed premium to ensure cover remains affordable, she believes some customers will appreciate the upfront discount. As an example, she says that, at LifeSearch, there is plenty of demand for income protection from the friendly societies. This is age-related with premiums increasing as the policyholder gets older.
As well as appealing to clients who may have traditionally opted for a lower cost term assurance policy, Mr May believes there is also the potential to reach out into the direct market where the non-underwritten product dominates sales. “Vitality’s products help to make WOL more accessible,” he says. “If people see there are other affordable options available, they might consider underwriting, which can offer many people better value.”
Whether or not VitalityLife succeeds with its new WOL products may come down to advisers being able to strike a balance between the additional complexity and affordability. But, by putting the concept of an affordable WOL proposition out there, more people could end up with cover that suits their needs.
