ProtectionAug 24 2016

Level term cover recommendation costs adviser

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Level term cover recommendation costs adviser

SPF Private Clients has been told to compensate a client after the Financial Ombudsman Service ruled she should not have been sold cover on a level term basis.

Miss M complained about a term assurance with critical illness policy recommended to her by SPF in 2007.

At the time she was looking to purchase her first property on a shared ownership basis. The adviser recommended a mortgage and a protection policy which was made up of life assurance and critical illness cover.

Miss M took out a level term policy, a suitability letter was sent and shortly after she emailed the business and asked a number of questions.

In 2015, she complained the business told her that taking out the policy was a condition of obtaining the mortgage and she did not need it because she had employee benefits.

An adjudicator said the documentation made it clear that the policy was not compulsory and while Miss M may not have required life assurance, the critical illness cover was useful for her.

As there was no cost saving in having a stand alone critical illness policy, the adjudicator did not consider the cover to be unsuitable in principle.

But, the Fos did state Miss M did not require cover on a level term basis, as this policy was to protect a repayment mortgage which would decrease in value over time.

So, the adjudicator said the complaint should be upheld on the basis that the cost of this policy should be compared to the cost of a decreasing policy and any saving plus interest should be paid to Miss M.

Both she and the business disagreed with the adjudicator.

Miss M argued her premiums should be reimbursed and SPF argued as Miss M was buying the property on a shared ownership basis, it made sense for her to have level cover in the event she decided to buy a larger share.

SPF also responded the level term cover would be useful as she had to pay rent and a service charge, so it would help to meet these expenses in the event of her sustaining a critical illness.

The adjudicator ruled the rent and service charge commitments did not warrant taking out a level term policy.

In her final decision, ombudsman Julia Chittenden agreed with the adjudicator that Miss M did not require cover on a level term basis.

The adviser was ordered to pay compensation based on the difference between the cost of Miss M’s policy and what the cost of a decreasing term assurance with critical illness policy would have been if it had been taken out at that time.

The business was also told to add interest at 8 per cent a year on the difference between the costs of the two policies from the date each premium was paid to the date of this decision.

emma.hughes@ft.com