Life assurance policyholders warned of potential sting in the tail

Martyn James of Resolver, a complaints service, said: “This is a common problem. Life assurance policies come in many different forms and people aren’t always sure what they are getting into. When you get to the review point, it catches people by surprise.”

He said that, while there had been improvements, the industry had a long history of transparency and mis-selling issues and that many problems were only now coming to the fore.

“No one would buy these policies if they knew at the point of sale that they would be paying in money over the years with no guarantee they can get it back if they change their mind – they would simply put it into savings,” he said.

“These whole-of-life policies are being hard-sold on television and in other media all the time. It’s important that the terms and conditions are clear and that people understand they may be paying in a lot of money over the years, and that the value of the plan can change.”

James Jones of Knight Frank Finance, a mortgage and insurance broker, said any life policy that had an investment element always carried a certain level of risk.

“We do not sell or advise anyone to buy these unit-linked products for that exact reason,” he said. “The onus is on the person selling a policy to advise the consumer of the risks involved. If Mr Reed was not properly advised, he was most likely missold something.”

One of the main reasons people take out whole-of-life cover is to reduce their inheritance tax liability. When a person dies, before their wealth can be passed on to their family the taxman will generally take 40pc of the value of their estate on anything over the personal threshold of £325,000.

By writing their life assurance policy “into trust”, they can pass on the payout to their family without it counting towards the allowance.

Mr James said “no plan was created equal” but some could be “an efficient way of providing a legacy”.

Whole-of-life cover could also be worth it if a person does not have a long life expectancy, as they will pay in a smaller amount in premiums and still receive a guaranteed lump sum on death.

Dan Hutson, of comparison site comparethemarket.com, said a man in his 60s who smoked heavily had a better chance of getting a good deal from a wholeof-life policy, relative to what he would pay in premiums, than a younger, healthier person.

“There are some savvy people who will do the maths and figure out whether it is worth it,” he said. “It can be cost-effective for people who don’t live as long as others, but there is little to no value in these policies for people under the age of 50.”