Millions face 50% cut in life insurance payout
MILLIONS face cuts of 50 per cent and more in life insurance payouts designed to offer protection and peace of mind.
People who have been paying monthly premiums for 15 to 20 years on the basis the policy would pay off a mortgage or provide a useful lump sum could be in for a shock.
Letters have been sent to thousands warning that payments will be much lower than originally believed. But millions of policies have been sold.
The problem does not relate to so-called term life insurance, which most people use to cover things like paying off a mortgage if they die prematurely. These are relatively cheap and run for a fixed period, generally 20 years, and lapse if the customer does not die within the term.
The issue relates to whole-oflife policies, where premiums are invested and will pay out on the death of the holder, whether they live to 50 or 100.
Some 10million of these policies have been sold and it seems the expected payments on death have been slashed. The reason appears to be a combination of poor investment returns and decisions, together with big commissions and charges taken by salesmen and the insurers.
The Financial Ombudsman Service has received 10,000 complaints about these policies over the past six years and it says numbers are rising.
Some cuts in predicted payouts have been around 50 per cent, but there have been reductions of as much as 70 per cent.
One Sun Life of Canada customer has been paying monthly premiums of £31.60 for 20 years believing it would pay £113,500 on death. He received a letter from the firm saying the figure had come down to £36,950.
Andrew Holland, 50, from Basingstoke, Hampshire, said: ‘I was completely shocked. I still have a mortgage and need it protected for the sake of my family. It is not quite so large now, but it is bigger than £36,000.’
Whole-of-life differs from other forms of life insurance because the premiums and sums assured are reviewed periodically, usually after ten, 15 and 20 years. These reviews allow the premiums to be increased or the final payout to be reduced.
Mr Holland said: ‘I did know the terms could change. But it never occurred to me that cover could be reduced so dramatically. It is the scale and suddenness that came as a shock.’
Insurance expert Alan Steel, of Steel Asset Management, said: ‘The whole business is outrageous. Many of these contracts paid a high commission and that is why they were sold.’
Mr Holland complained to Sun Life of Canada and the ombudsman but was unsuccessful as the company had warned him the sum assured could fall.
A spokesman for the ombudsman told the Sunday Telegraph: ‘Complaints about these contracts are high and usually linked to the review dates.’
Sun Life of Canada has confirmed that other customers with whole-of-life policies have also been warned of cuts in the final payout. It said the reduction in Mr Holland’s predicted payout was because he had opted for maximum life cover from the outset, rather than a shorter or lower level of protection.
‘Completely shocked’