‘I paid in £18k – now my life cover will pay out £3.48’

Certain deals could leave consumers with effectively worthless policies despite rising premiums, writes Harry Brennan

Consumers are at risk of being caught out by dramatic and unaffordable changes to their reviewable life cover policies and could be left with a worthless plan after decades of paying premiums. The guaranteed payouts on “whole-of-life” insurance policies are based on assumptions of what will happen in the future and are subject to review at regular intervals.

This means the monthly premium or the “assured” final lump sum could change at the whim of the insurer.

The most common type of wholeof-life insurance policy, also known as a life assurance policy, requires the holder to make monthly premiums for life, or sometimes until the age of 85, in return for a lump sum paid on death. Parts of the premiums are put into investment funds, which means the policy can build up value over time to allow the consumer to cash in early.

However, there is a risk that the value of this investment could fall or that the cost of providing the policy will rise. At review, the insurer could ask for higher monthly premiums or a cut in the eventual payout as a result.

Over a period of 25 years, Colin Reed, 58, had paid £18,000 into a whole-of-life insurance policy with SunLife. He inquired about cashing in the plan, only to find its current value was a paltry £3.48.

The so-called “assured cover” of the SunLife policy he bought in 1993 for him and his wife was slashed from £184,000 to £64,000 after the insurer decided to review his plan.

Mr Reed, a managing director of a building services company, was given the choice of increasing his monthly payments from £82 to £240 or seeing his cover reduced in July. He said his premiums had steadily increased over the past 25 years and that he was worried he could now end up paying more than he would get out.

He considered cutting his losses and asked SunLife how much he would get back if he surrendered his policy early.

Because his plan is investmentlinked, SunLife explained, its early exit value would be barely enough to buy a cup of coffee.

With most whole-of-life policies, only parts of the premiums are invested, with the rest going towards the lump-sum payout on death, sales commissions and other fees.

Mr Reed said the surrender value in previous years was closer to £4,000 and he did not understand where the money had gone.

“They can’t guarantee what will happen in the future, which is the real worry,” he said. “I have a feeling the value of the policy will be reduced to nothing unless I keep putting up my monthly premiums. I don’t really want it but am stuck in the trap of walking away having paid in all this money, or carrying on.”

Mr Reed said he was originally looking for fixed-term life insurance to protect him for 20 years or so while he was paying off his mortgage and had children to look after.

He said he was mis-sold the policy by his brother, a SunLife employee at the time, in 1993: “He had just started working there and I felt under a bit of pressure to help him get his first sale. I didn’t really know what I was signing up to.” He added that his brother had left SunLife not long afterwards.

A spokesman for SunLife said reviewable policies with low premiums and high payouts were once popular across the industry.

“They were commonly sold through an intermediary who would have highlighted that they were protection and not savings policies, with a risk that premiums may increase, and with little or no surrender value,” he said. “These policies are no longer sold by SunLife.”

Mr Reed said he was now in touch with the Financial Ombudsman Service, which told him it might consider a complaint on the grounds of mis-selling. The ombudsman has said it receives more complaints about reviewable plans than any other kind of life assurance policy.