A report published in The Sunday Times told the story of a retired financial adviser who saw the cost of his whole of life policy jump from £158 to £1,500 a month over the space of 20 years.
Advisers cautioned the whole of life policy taken out by the retired adviser with Scottish Provident back in 2001 was not representative of the entire life insurance industry.
“The vast majority of life insurance bought in the UK is term assurance, and not whole life,” said Kevin Carr, chief executive of Protection Review and former co-chairman of the Income Protection Task Force (IPTF).
He referenced Swiss Re data, which suggests more than 1m people in the UK bought term assurance last year, but only 20,000 bought underwritten whole of life policies.
No matter when a person dies, a whole of life policy guarantees their loved ones a lump sum payout from the insurer. Conversely, term life insurance guarantees a payout should a person die within the specified term of the policy.
Whilst guaranteed premiums start off seemingly more expensive, renewable premiums start off seemingly cheaper and shoot up over time.
The adviser's renewable plan was also based on an investment element, a feature no longer widely available across life insurance products.
Darren Cooke, director of independent financial planner Red Circle, explained: “What seems to have happened here is the policy was set up on a maximum cover basis, i.e. the premiums mostly paid for the cover and there was very little of the investment element. So the premium was always likely to rise at review.”
Cooke continued: “In other words, the cover was cheap at the outset. But that was always likely to bite him later and indeed it has.”
Term cover has always “far outweighed” whole life plans, according to Cooke, due to the fact the latter product is always far more expensive in the long run.
“I'd say they [whole life policies] were, and remain, the minority of plans sold and this position only arises where they were sold on the maximum cover option which should be even rarer.”
Warren Shute, a chartered wealth manager, added a more level plan would have been “a standard whole of life, which 'back in the day' was down to investment return and age-based costs”.
Shute continued: “Today neither of these plans are available in this form. If you want a whole of life, you buy a whole of life term assurance plan.”
There are also shades of grey in between these two seemingly opposing product types. Paul Claireaux, a financial adviser turned author, pointed out: “You can buy guaranteed fixed premium whole life policies. These offer incredibly high equivalent internal rates of return on your premiums for a great many years.”
‘Commission isn’t necessarily a bad thing’
A big point of contention which came out of the debate surrounding The Sunday Times report was the portrayal of commission versus customer fees.
Kathryn Knowles, a specialist protection adviser and managing director of Cura Financial Services, said “commission isn’t necessarily a bad thing”, and explained why.
If commission is paid by the insurer, then a fee isn’t charged to the client. In the absence of commission, Knowles asked: “How would you charge a person a fee who has cancer or multiple sclerosis?”
Her firm largely works with vulnerable customers, and operates on a commission-only basis.
“You might have to triple the fees to cover the time you help them, which borders on discrimination.”
This is because the time taken speaking to underwriters, liaising with insurers and GPs, chasing the insurer, and paying the invoice can stretch into months for more vulnerable clients. Particularly if there is an error in the GP report, or if an adviser needs to study the medical report.
Knowles said this process can “easily” see three or four people in her team “constantly involved” to get cover for them. “Pricing that would be unfair.”
She continued: “Commissions can reduce the price, but usually don’t increase them. [...] I’m not saying no-one abuses the system. There’s pros and cons to all of them, but it’s so important not to be so black and white.”
Carr agreed that “commission may not be perfect but it is far better than the ‘fee-only’ alternative for consumers buying protection”.
Savings aren’t a good alternative
The story suggested consumers could save and invest rather than take out a life insurance policy.
But advisers said it was not so black and white.
“To suggest that investing is automatically a better solution than life insurance is risky at best,” said Carr. “It might be fine if you know when you’re going to die, but most of us don’t.”
David Hearne, a Maidenhead-based chartered financial planner, agreed. “Insurance is for insurance and savings are for savings. They shouldn’t be combined. And you shouldn’t mistake past premiums paid as wasted money if you stop the policy or reach the end of the term,” he said.
This was because whilst a person is paying a policy, it gives them the cover they need when they need it. “And if we’re talking about life insurance then it’s usually good news if you didn’t need it!”
Hearne used the example of when “people call rent wasted money”. “It’s not,” he said, “it paid for what you needed when you needed it.”
The adviser added: “Another comparison is reading a bad book. Just because you’ve read half of it, doesn’t mean you have to read the rest if it’s bad. Similarly with insurance premiums. If you no longer need insurance or there’s something better to spend your money on, you should do that, and not necessarily keep paying because you always have. In behavioural finance it’s known as the sunk cost fallacy.”
‘Minimal qualifications’ still an issue
Whilst advisers were largely keen to rally round the life insurance sector and defend it, Cooke did acknowledge the issue of “minimal qualification” which the story also raised.
“The plan itself isn't dodgy,” he explained. “But the way it was sold may be if it was not fully explained to the client how the plan was being set up and what that might mean down the line for their cover or premiums.”
Cooke continued: “Of course, years ago many advisers had minimal qualifications themselves and an ability to sell the product often came above an ability to understand it.
“Somewhat frightening is the fact you still don't really need many qualifications to sell life cover.”
Cooke cited an anecdote of his own. “One well known insurer launched with advisers running networks of agents to sell their plans, all signed off by a qualified adviser. One guy near me recruited a load of agents - teachers selling in their spare time, personal trainers. One guy I met networking had been in marketing for a brewery."
He added: “When one relatively small sale could earn you £300-500 or more, you can see why it was tempting to these people as a side hustle. Or even as a full time job. Despite the fact they mostly didn't have a clue what they were doing.”
ruby.hinchliffe@ft.com
