Advisers across the UK have rallied to dispel some of the “myths” about life insurance, after a damning newspaper report on one adviser's experience with the product.
A report published in The Sunday Times told the story of a retired financial adviser who saw the cost of his whole of life policy jump from £158 to £1,500 a month over the space of 20 years.
Advisers cautioned the whole of life policy taken out by the retired adviser with Scottish Provident back in 2001 was not representative of the entire life insurance industry.
“The vast majority of life insurance bought in the UK is term assurance, and not whole life,” said Kevin Carr, chief executive of Protection Review and former co-chairman of the Income Protection Task Force (IPTF).
He referenced Swiss Re data, which suggests more than 1m people in the UK bought term assurance last year, but only 20,000 bought underwritten whole of life policies.
No matter when a person dies, a whole of life policy guarantees their loved ones a lump sum payout from the insurer. Conversely, term life insurance guarantees a payout should a person die within the specified term of the policy.
Whilst guaranteed premiums start off seemingly more expensive, renewable premiums start off seemingly cheaper and shoot up over time.
The adviser's renewable plan was also based on an investment element, a feature no longer widely available across life insurance products.
Darren Cooke, director of independent financial planner Red Circle, explained: “What seems to have happened here is the policy was set up on a maximum cover basis, i.e. the premiums mostly paid for the cover and there was very little of the investment element. So the premium was always likely to rise at review.”
Cooke continued: “In other words, the cover was cheap at the outset. But that was always likely to bite him later and indeed it has.”
Term cover has always “far outweighed” whole life plans, according to Cooke, due to the fact the latter product is always far more expensive in the long run.
“I'd say they [whole life policies] were, and remain, the minority of plans sold and this position only arises where they were sold on the maximum cover option which should be even rarer.”
Warren Shute, a chartered wealth manager, added a more level plan would have been “a standard whole of life, which 'back in the day' was down to investment return and age-based costs”.
Shute continued: “Today neither of these plans are available in this form. If you want a whole of life, you buy a whole of life term assurance plan.”
There are also shades of grey in between these two seemingly opposing product types. Paul Claireaux, a financial adviser turned author, pointed out: “You can buy guaranteed fixed premium whole life policies. These offer incredibly high equivalent internal rates of return on your premiums for a great many years.”
