‘My insurer will cut my life cover by 82pc’
Aviva is holding this 75-year-old to ransom: she must pay £5,600 more per year or lose most of her cover, writes Amelia Murray
In one of the most shocking of many cases to emerge involving life insurance plans sold in the Eighties, a woman aged 75 has been told to increase her current £2,178 annual premium to £7,784. Provider Friends Life, part of giant insurer Aviva, warned her that if she did not make this increase her payout on death would fall from £206,083 to £38,597.
Friends Life softened the blow by saying the premium increase would start to apply only in seven years’ time. But this is a worry for Your Money reader Marie Burkinshaw, who will be 82 when she is expected to find the extra money.
From the late Seventies to early Nineties “whole of life” insurance policies were aggressively sold as a way to clear mortgage debts or meet funeral costs at death.
Years later, countless policyholders are now discovering the “reviewable” nature of the insurance. This means premiums can be put up by insurers, often with no explanation.
Telegraph Money has been inundated with emails from shocked readers who, after paying premiums for 10 years or more, have been told these payments must increase – or the cover will be cut.
Ms Burkinshaw and her late husband were sold a Sun Life “flexible life insurance policy” in 1986 by independent broker Lionel Smith & Co. It was supposed to cover inheritance tax.
At a time of the sale, Ms Burkinshaw was visited at her home by the director of the firm and a Sun Life representative.
For years she has been paying an annual premium of £2,178 for two policies to ensure cover of £206,083. During this time, the provider changed to Axa and then Friends Life, now part of the Aviva group, and her premiums did not increase.
It is unclear precisely how much her premiums over the decades have come to, but the total is at least £48,000.
Last year she was contacted by Friends Life and told that, in order to maintain her cover for the rest of her life, she would need to pay £7,784 – an extra £5,606 a year, or almost £500 per month.
Friends Life said her cover could be maintained for the next seven years at her current premium. If no action were taken by this time, cover would fall to £38,597.
Critics of these plans say they are unfair because the insurer carries no risk – the risk rests with the policyholder.
Ms Burkinshaw said she was shocked by the “reviewable” nature of the policy.
She said: “I was never told this was how it worked. I saw it as life insurance – I didn’t realise there was an investment part to it.”
With some whole of life policies, part of the premium is invested in a fund exposed to shares, bonds and other assets.
When the plans are reviewed, customers may face a premium increase or cut to their cover if these investments have performed poorly.
Independent insurance consultant Kevin Carr said Ms Burkinshaw might have had a review every 10 years. But the premium might not have changed because the investment performance was adequate.
He said a number of things had affected insurers’ investments, including a fall in returns on gilts.
Ms Burkinshaw said: “Having paid the premiums for 29 years, to be informed at this late stage in my life, and on a fixed retirement income, that I would have to find an additional annual premium of some £5,500, which can again increase, is most unfair.”
Nor will the extra premium guarantee cover. Premiums could rise again.
The letter said the new £7,784 premium “should” maintain the cover for the rest of Ms Burkinshaw’s life, but added that the premium could still change, depending on “whether the assumptions made, including those concerning investment growth and the cost of providing the cover, are borne out in practice”.
Ms Burkinshaw was also given the option to increase her premium to £5,010 – still almost double her current payment – to guarantee the present projected sum for the next 10 years. Alternatively, she could continue to pay the same premium and have projected payout reduced.
She complained about the misselling of the policy to the Financial Ombudsman Service, the resolution service. However, she was told her case was outside the ombudsman’s jurisdiction as “the period of sale” was not covered.
Regulations about the advice given on financial products came into effect on April 1 1988. Martyn James, a consultant and former spokesman for the ombudsman service, said just because a problem predated the ombudsman’s existence did not mean you could not make a complaint.
He said it was worth contacting the ombudsman anyway, as well as the Financial Conduct Authority, which regulates financial firms.
In this case, Mr James suggested that Ms Burkinshaw could file a complaint with the company appointed as the agent of her plan, Redwood Business Insurance Services.
Mr James said: “The new firm is not responsible for previous business and how policies were originally sold. However, if it is taking commission from the premiums paid by clients, it has a duty to make sure they understand what they are paying for.”
“If Ms Burkinshaw had known her policy was reviewable before, when she was younger and in better health, she could have gone elsewhere and saved herself money. The question is, did the new firm prevent her from doing so?”
Redwood Business Insurance Services declined to comment.
Relating to the plan itself, a spokesman for Aviva said: “Reviews of these types of policies are periodically taken in order to determine whether the level of cover provided can be sustained by the premiums and, if not, to notify the customer of their options to reduce cover or increase their premiums.
“Ms Burkinshaw’s policy has not had a premium increase since it started in 1986, and our most recent review of her policy anticipated that her current level of cover could be sustained for a further seven years until 2022, at which point an increase in premiums or reduction in benefit may be required.”
‘How is this insurance when the policyholder carries all the risk?’