Whole of life policy - astonishing rise in premium - recourse?

My client took out a whole of life policy in 1996. The sum assured is £2 million, in trust for the children. Aggregate total of premiums paid is already £2.5 million. Last year, the annual premium was £211,000 and this year, the family has been notified that the premium will be £422,000 and will now be reviewed annually.

The press has contained coverage of a general trend towards increasing premia for whole of life policies because of poor returns experienced by life companies. This however seems eye-poppingly extreme.

Family members (acting as attorneys) are torn between ditching the arrangement and continuing; do forum members have any views about the legitimacy of such an increase and whether the attorneys have any rights to force a reconsideration by the life company and if so, how?

Jill MacMahon
Thackray Williams LLP

A good reason for advising against policies with reviewable premiums, which seem cheap at the outset, but can become extremely expensive, as Jill has pointed out. A better option can be a fixed rate whole of life policy, preferably with a maximum period for payment of premiums, incorporating also a decreasing term assurance element, as hopefully the whole of life cover increases.

It would seem an actuary might perhaps be the answer to advise whether this is excessive, taking account of the terms of the original policy.

Simon Northcott

The premiums do seem high at 20% of the sum assured, even if it were a term policy rather than a whole life policy. In any event it indicates a life at a pretty advanced age.

With a conventional Whole of life policy, an insurer quotes a fixed premium payable for life or with premiums ceasing at some advanced age. Initially the premiums greatly exceed the cost of the life assurance and so the insurer builds up reserves. As those reserves grow the amount that the insurer is in practice at risk for decreases as the difference between the reserves held and the Sum Assured reduces.

With a conventional policy the insurer not only assumes the explicit mortality risk, it also implicitly assumes the investment risk. If investment returns are less than is assumed in the premium calculation, the reserves increase slower than expected and the insurer is on the hook for the extra claims cost. (Sum Assured less Reserves)

In life assurance the long lived subsidise the those less fortunate, and it is possible for policyholders who take out conventional whole life policies at older ages to later realise that they have paid more in premiums than their estate would receive if they died tomorrow. I did once deal with a policyholder who appreciated that on the whole he was actually quite lucky that his Whole of Life policy had turned out to be such a poor investment. After all, it could have been an excellent investment but that would have had other implications

With a reviewable whole life policy there a two approaches to premium calculation.

In the first case the insurer can take a more realistic view of expected investment returns, rather than the conservative ones implicitly guaranteed in the conventional premium calculation. At the end of the ten years the insurer looks at the investment returns it has actually achieved and compares the reserves it actually has with those it expected to have at that stage. It then recalculates the premium to allow for any shortfall or even possibly reduces the premium if reserves are greater than expected.

In effect the policyholder takes on the investment risk and as investment returns are pretty important, the premium increase under this design could be significant but probably not on the scale you describe.

With the extreme version of the third design the insurer treats the policy, effectively as a renewable term policy with premiums in the first ten years sufficient to level out the increasing mortality risk over that ten years and to provide some small reserve to allow for the fact that the policyholder’s heath might deteriorate over the period. (there are no health questions at the review date). With mortality rates increasing from about one in ten thousand at young ages to one in five in the mid-nineties the premium increases will be eye watering because the insurer never builds up any significant reserves.

The conventional; option is a good long term safe solution.

The one where the policyholder just effectively guarantees the investment return is also a longer term solution and probably a good bet, but one most policyholders will probably have lost in recent years.

The third option is a short term solution. For a fairly young client who recognises that he could die at any time but doesn’t want IHT issues to rule his financial planning just yet, it is an ideal stop-gap solution. Effectively it gives you time to do more serious IHT planning later or simply to allow for time to pass.

The premium does seem rather high but I suspect that, in part, the fundamental problem is that the client assumed a stop-gap solution was a permanent solution. The advisor probably should have made the situation clear.

Ian McKeever

Ian McKeever & Co Consulting Actuaries

I worked for Hambro Life (now St James’ Place) many many moons ago. As I recall, their “Flexible Whole Life” guaranteed a minimum death benefit for the first 10 years and then 5 yearly reviews thereafter, or 1-yearly reviews once the life assured turned 75. If memory serves, I think Target Life were one of the first to introduce such a policy and the Hambro version followed the same format and I imagine, most others have/do.
Commissions were huge, sometimes as much as the sum of the first two years’ premiums.
As the previous poster has said, the variables within the policy are investment returns and mortality deductions. If you don’t follow the life office recommendations at each review then the contract would likely grind to a halt at some future date with mortality (sum at risk) deductions exceeding the combination of regular premium/contract investment value/investment returns.
It is difficult to see how flexi-whole-life can be recommended for IHT planning (as I imagine the policy in question was) in comparison to a non-profit whole-of-life contract.
In my view, these are (and have been) a huge potential miss-selling playing field and I feel that the family members need to closely consider the documentation produced by the life company at the point of sale.

Paul Storrie
Storrie & Company

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Thanks to Paul Storrie, Ian McKeever and Simon Northcott for their contributions on this topic; as a result the client’s attorneys are going to examine whether the type of policy sold was fit for the purpose she was seeking it to fulfil.

Interestingly, I recall that the IFA’s commission for setting it up 20 years ago was (wait for it) £80,000.

Jill MacMahon
Thackray Williams LLP