Canada Life has been told to cough up compensation for advice that was deemed by the ombudsman not to be "suitable in all circumstances."
A client, referred to as Mrs T, complained about a ‘reviewable’ joint life, last-survivor whole life policy she and her husband were advised to take out by a predecessor firm of Canada Life Limited in April 1994.
Specifically, she said she and her late spouse weren’t made aware of the reviewable nature of this policy, or the potential size of the premium increases following an unfavourable review.
She recalled the adviser assuring them that they would only ever need to pay the initial premium for a fixed term to maintain the original level of life cover.
In April 1994, Mr and Mrs T arranged a mortgage of £25,000 on a capital repayment basis over 15 years.
Prior to that, in September 1987, Mrs T had taken out a reviewable whole life policy on her life for £20,000 for the benefit of her daughter (referred to as policy A).
Mr and Mrs T's respective pensions made Mr T more vulnerable financially than Mrs T so they wanted the mortgage largely repaid if Mrs T died, and partly repaid if Mr T died, during the term of the loan and they had a budget of £100 per month for this protection need.
The adviser quoted a monthly premium of £95 for a 15-year decreasing term assurance policy providing life cover of £25,000 on first death but pointed out this was prohibitive and didn’t meet their wish for a return if they survived the mortgage term.
So, the adviser recommended Mr and Mrs T use policy A as protection for the mortgage and for them to take out another policy, which was referred to by the ombudsman as policy B, for their daughter's benefit.
This policy was also reviewable and provided life cover of £20,000, payable on second death, at an initial monthly premium of £35.
They were also advised to take out a joint life, first death endowment savings plan over 14 years, which provided life cover of £6,877 (referred to by the ombudsman as policy C).
Mr T could, therefore, more than repay the mortgage from the proceeds of policies A and C if Mrs T predeceased him.
For Mrs T's protection, policy C would repay part of the outstanding mortgage if Mr T died or when it matured in April 2008.
When Mr T died in July 2007, policy C paid a cash sum to her of £6,877, which fully repaid the mortgage whose outstanding balance was roughly £4,282 by then.
But, as the proceeds of policy A and policy B would only become payable whenever Mrs T died, these two policies remained in force in July 2007, subject to future reviews.
At its tenth anniversary, policy B was reviewed and Canada Life notified Mr and Mrs T that the monthly premium needed to increase to £42 per month to maintain life cover at £20,000.
The sum assured would reduce to £17,700 if they left the monthly premium at £35.
Mr and Mrs T chose to increase the premium to £42 per month to preserve the original level of cover.
At each annual review until 2016, the monthly premium stayed at £42.
But in March 2016, Mrs T was notified that the monthly premium needed to increase to £118.80 to keep life cover at £20,000.
She chose to keep the monthly premium at £42 and as a result the life cover under the policy was reduced to £13,250.
But just a year later she was told £42 was no longer enough to support the sum assured of £13,250 and she needed to increase this premium to £78.10 per month.
As she chose to keep the monthly premium at £42 her life cover reduced to £10,380.
A further review in March 2018 then concluded that her monthly premium of £42 wasn’t sufficient to support life cover of £10,380 and she needed to increase this premium to £105.88 per month or life cover would reduce to around £4,500.
This sum was now guaranteed provided she continued to pay £42 per month but the policy would no longer pay a surrender value.
At this point, she felt the whole advice she received with her late husband in 1994 was questionable.
A spokesman for Canada Life pointed out Mrs T already held a "reviewable whole life policy since 1987, so she would have known how they worked and the premium did increase at the very first review."
Canada Life also argued the situation was created by Mrs T continuing policies A and B after the mortgage had been repaid.
Canada Life stated it was appropriate to provide advice that fully protected Mr T if Mrs T died first, as she was a higher earner plus both policies only required an increase in monthly premiums at very recent reviews.
However the Financial Ombudsman Service pointed out the adviser would have known in 1994 that, as Mr and Mrs T grew older, these policies would become progressively more expensive to fund and/or fail to give a worthwhile surrender value due to the increasingly greater mortality charges for life cover.
Canada Life was ordered to compensate Mrs T.
Ombudsman Kim Davenport said: "My view remains that the simplest, and most appropriate, advice for Mr and Mrs T in 1994 was to leave policy A for the benefit of their daughter and to take out a 15-year, joint life decreasing term assurance policy for £25,000, payable on first death for which the adviser quoted a monthly premium of £95.
"The amount payable from this policy (equivalent to the amount still owing on the mortgage) when Mr T died in July 2007 would have been £4,282. There was no need for Mr and Mrs T to have taken out policy C at all."
emma.hughes@ft.com
