The opportunity to buy low-cost life insurance without having to answer intrusive medical questions is an attractive proposition for many seniors.
When the cover is promoted on daytime television by trusted celebrities, as it has been for many years, this cover can be irresistible.
But that insurance could turn out to be an expensive mistake, especially if you live into your late 80s or 90s — or decide to stop the monthly premiums.
Expensive mistakes? SunLife insurers have used Sir Michael Parkinson in their advertisements
John Vigar, a retired timber industry executive, believes he was misled into purchasing such insurance. John, who had recently turned 90, took out two “secured over 50s” insurance policies in April 2011 with SunLife, an insurance company that used Sir Michael Parkinson in its advertising.
One policy was for John and one for wife Anne – because he wanted to leave some money to their three eldest children.
The policies ensured the payment of £1,625 on the death of Anne and £1,405 on the death of John. But upon receiving the policy’s annual statements in April of this year, he discovered that they had already paid more in premiums than they could have earned in the combined damages over their deaths.
For the past seven years, John has paid £24 a month for each policy. John thought about stopping the payments, but buried in the small copy of the original documents, he found the wording: “If for any reason you stop paying your premiums, your plan will be canceled and you will not get any money back.”
The only concession is a six-month period allowing for the missed payment to be made.
John agonized over how to escape this money hole – and contacted The Mail on Sunday about his concerns. But then Anne died suddenly in June, at the age of 89, just months before the couple were to celebrate their 60th wedding anniversary. John was devastated.
SunLife paid £1,625 on Anne’s death, but this was £400 less than what the couple had paid in insurance premiums for her policy. ‘It’s a little consolation that we only paid £400 more for Anne’s plan than we did,’ says John. But what should I do about mine?
So far he has paid £1,700 for the document which, on his death, will pay £1,405. He feels misled and had he known about the problem, he would have chosen the savings account instead.
John was also unlucky in choosing SunLife (which became AXA and then more recently Phoenix) because it was one of the few providers that demanded continued payment on his plan in perpetuity.
STARRING ROLE: LV = British actress Julie Walters was used as the face of Plan 50 Plus’ ad
Many other companies stop collecting premiums automatically when a customer turns 90 but allow the cap to continue. SunLife offers this as an option on newer plans.
John is doubly offended by the expensive advertisements that keep running on daytime TV. He says the basic fact that coverage would stop if the premiums weren’t maintained was too small to see on screen.
Only recently had his son referred to exclusion while they were watching TV together. “People shouldn’t accept this insurance offer unless they think they’re going to die in five years,” he says. Several thousand of these plans are sold each year – and SunLife boasts a 60 percent market share.
People often buy plans to ensure there is an amount to pay for their funeral. But these costs are mounting. Last year, funeral bills averaged around £4,300 – around 5 per cent higher than the previous year.
Free alarm clocks, £100 shopping vouchers and £10,000 prize draws are just some of the incentives providers have used over many years to attract new customers – along with ads featuring celebrities such as Michael Parkinson and actress Julie Walters, who have appeared in ads for LV =.
James Daley, of the consumer website Fairer Finance, says: “Celebrities tend to take customers’ eyes off the ball when they need to focus on an important financial decision. People should fully understand the limitations of these policies.
Over 50s plans can be attractive to people in poor health who do not expect to live very long. But some plans will only return the premiums paid if you die in the first year or two. If you reach the premium tipping point — where you’ll get less interest than you actually paid — you’d better grit your teeth and move on. Give up and the security deposit is lost forever. Those who want to increase the sum insured in line with inflation can choose a provider with this option – but the premiums will also go up.
For example, the inflation-linked cover offered by Sainsbury’s requires the policyholder to increase premiums by two and a half times the rate of inflation.
Some plans, such as SunLife’s, will pay the full guaranteed amount if the policyholder dies within two years of implementing the plan — but only if it is as a result of an accident.
Policyholders who struggle to meet premiums can sometimes choose to reduce them to get lower interest. The Royal London Over 50s policy is the only one to receive a five star rating from Fairer Finance.
As for John, he was still not sure whether to stick around or stick around.
Nine out of ten policy buyers do not use a trust which can avoid a huge tax bill
Concerns about how loved ones will deal with the death of a breadwinner mean that many people take out life insurance that guarantees a tax-exempt lump sum upon death.
But The Mail on Sunday has learned that as many as nine out of ten policy buyers fail to take simple steps to prevent these plans from being derailed by a potential 40 per cent tax bill. The trap can be avoided by completing a legal document called a “trust deed” soon after the purchase.
An inheritance tax of 40 per cent is levied on any of the deceased person’s estate worth more than £325,000 (or £650,000 if married or a widower).
If the policy isn’t placed in a trust, any windfall is added to any worldly goods left over — and can land your beneficiaries with a bill.
The trust deed can be downloaded from your insurance company’s website. This removes any payments from the estate – so there should be no death tax to pay. Another advantage is that the funds are available as soon as the insurance claim is paid—it’s not left to languish while the estate goes through probate, which can take months.
This is vital if the family needs cash to cover bills such as funeral costs. It could also help meet a controversial new stealth tax on probate revealed last week – rising the cost of securing legal control of an estate next year from the current £215 fixed fee to £6,000 in larger estates.
“Putting a policy into a trust sounds a lot more complicated than it actually is,” says Tom Bigree, of insurance broker LifeSearch. “You just need to decide who should receive the money and then fill out one form. Unfortunately, not many have been able to do that.”
People can be deterred because trust documents can only be regulated after someone has purchased their insurance. Another hurdle is making the right decision to trust. An “absolute” trust is suitable for most people who want to leave money to a spouse or children. But once established, a trust cannot be changed. A “discretionary” trust is more flexible and beneficiaries can be added later.
It is never too late for a life insurance policyholder to place his policy in trust. The trust deed can be completed at any time and sent to the insurance company.
Forms are available at most insurers’ websites, says Angela Morfitt of Firestone Financial Management. It says: “The insurer will not be held liable for the impact of using these trusts – and will add a warning that you should seek legal advice.”
Policyholders who prefer legal aid can obtain customized documents from around £250 from specialist credit companies. Find one at uniased.org.uk or step.org.uk.
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