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ombudsman news

issue 103

June/July 2012

complaints involving whole-of-life policies

Whole-of-life policies are a type of life assurance. They provide a sum of money to a consumer's family or estate when the consumer dies. The consumer pays either a lump sum upfront, or monthly premiums.

Providers sometimes recommend whole-of-life policies for savings purposes - or to those consumers who are looking for savings and life assurance together.

Most of the complaints we see are about "reviewable" whole-of-life policies. When someone takes out a reviewable policy, the provider invests some of the money that the consumer pays. The amount of money that the consumer is required to pay - and the sum paid out if they die - are set on the basis of certain assumptions about what will happen in the future - including how well the investment fund will perform.

These policies normally have "review dates" when - if things have not gone as well as expected - the provider may ask the consumer to increase their premiums, or suggest that the level of cover is reduced.

As with any investment, it's important that a consumer who chooses a whole-of-life policy understands exactly what they are taking out and what to expect in the future.

Problems do sometimes arise. Our online technical resource on whole-of-life policies provides more information about the approach we take when cases reach us.

The following case studies illustrate some of the more common problems that we see. The first two focus on consumers who said they had not realised that their policy would be reviewed. In the third case, the policy was not reviewed at the right time, which led to problems further down the line.

issue 103 index of case studies

  • 103/1 - consumer complains he did not know that his whole-of-life policy would be reviewed
  • 103/2 - consumer complains that her whole-of-life policy was reviewed and changed without her knowledge
  • 103/3 - consumer complains that whole-of-life policy review was not carried out at the right time

103/1
consumer complains he did not know that his whole-of-life policy would be reviewed

Having read about them in the weekend press, Mr G decided to take out a whole-of-life policy. Ten years later, his provider reviewed the policy and told him that he would have to increase his premiums significantly to keep the same level of cover - or keep his premiums the same and reduce his level of cover.

Mr G complained to his policy provider. He said he had not realised that the policy premium and level of cover were subject to review - or what could happen as a result. The provider replied that the review would have been explained in the terms and conditions and other paperwork that Mr G had been given when he took out the policy. Mr G disagreed. He said that the documents only contained "complicated small print" and that they did not make it clear that a review would take place. He decided to refer his complaint to us.

complaint upheld

We looked carefully at the paperwork that Mr G had been given when he took out the policy. We found that it used technical and legalistic language.

It was also set out in a way that we did not think would have alerted Mr G to the possibility that a review would take place - or indeed the implications of a review. Therefore, we did not think that the paperwork had explained the review process clearly enough.

To make a decision in this case, we needed to decide what Mr G would have done had the paperwork clearly explained the review and its consequences. So we looked carefully at Mr G's circumstances at the time he took the policy out. We were satisfied that he would have taken out a whole-of-life policy - because that was what he had wanted - but we considered that he would have done so on a non-reviewable basis. A non-reviewable policy - with the same premiums - would have provided him with less cover initially, but would have paid out a higher lump sum in the later years.

Following our involvement, the provider offered to reconstruct the policy on a non-reviewable basis, and Mr G was happy to accept.

103/2
consumer complains that her whole-of-life policy was reviewed and changed without her knowledge

Ms F had a whole-of-life policy. When she realised that she had not heard from her policy provider for some time, she contacted them. During the conversation, she found that they had reduced the lump sum that would be paid on her death.

The provider told her that the policy had been reviewed three years earlier, and that they had written to let her know that she had needed either to increase her premiums or reduce her level of cover. They went on to say that when they had not heard from her, they had assumed that she had wanted to keep her premiums the same - and reduce the level of cover.

It later came to light that Ms F had not received any letters from the provider because they still had her old address on its records. While she accepted that she had not asked the provider to update her address, Ms F complained that she did not know that it could review the policy. She also complained that it should not have made any amendments until it had managed to contact her. When the provider rejected Ms F's complaint, she decided to refer the matter to us.

complaint not upheld

We wanted to establish whether it would have been reasonable for Ms F to have realised that her policy would be reviewed. So we looked at the documents that Ms F had been given when she took out her whole-of- life policy. In our view, these did explain the review process clearly.

In addition, we established that Ms F had taken out the policy in question shortly after the review of another reviewable policy that she had taken out previously. So we were satisfied that Ms F should have realised that her policy would be reviewed.

We were also satisfied that the provider had fulfilled its obligation to let Ms F know that her policy had been reviewed - and the results of that review. In the letters it had sent her, it made clear what action would be taken if she did not respond to its letters.

It was not the provider's fault that it had written to Ms F's old address. And we did not agree with Ms F's argument that the provider should not have made any changes to her policy without her explicit consent.

However, as a result of our involvement, Ms F's provider reassessed the situation. As her health had not changed since she took out the policy, it agreed to reinstate her original level of cover. It asked her to pay the necessary premium increases - backdated to the date of the review. Ms F accepted this proposal.

103/3
consumer complains that her whole-of-life policy review was not carried out at the right time

Mrs M took out a reviewable whole-of-life policy in June 1995. The policy would pay a lump sum of £120,000 on her death. In November 2010, Mrs M's policy provider wrote to her and explained that a 10-year review should have been carried out in 2005.

However, this had not taken place. The letter went on to say that the provider would now assume that had Mrs M been given the option, she would have increased her premiums and maintained her level of life cover. The provider said it would add "extra units" to her policy - and Mrs M would not have to pay any backdated premiums.

However, the provider also told Mrs M that if she wanted to maintain her level of cover from 2010 onwards, she would have to more than double her premiums. Alternatively, if Mrs M wanted to keep her premiums the same, her level of cover would now need to be reduced significantly.

Unhappy with this situation, Mrs M complained to her policy provider. She reminded them that it had been their responsibility to carry out the 10-year review in 2005.

She said that if it had done that review - and told her immediately about the need either to increase her premiums or reduce her level of cover - she would have cancelled her policy at that point. Mrs M asked the provider to return the premiums she had paid since 2005.

The provider would not agree to this. It said that Mrs M had already received "the benefit of" £120,000 worth of cover between 2005 and 2010 and that if a claim had been made during that period, it would have been paid. Mrs M decided to refer her complaint to us.

complaint upheld

The policy provider did not dispute that it had failed to carry out the 10-year review. So we needed to decide what Mrs M would have been likely to have done if the provider had reviewed the policy and explained her options in 2005.

So we carefully reviewed Mrs M's circumstances at the time the review should have taken place. We concluded that, in her particular situation, she would not have continued with the policy had she been faced with the choice between paying higher premiums or accepting reduced cover.

We did not consider the fact that Mrs M had received the theoretical benefit of £120,000 worth of cover between 2005 and 2010 as central to the case.

When we put our view to the policy provider, it agreed to put Mrs M in the position she would have been in at the 10-year review stage - had she decided to cancel her policy at that time. This involved refunding the disputed premiums she had paid between 2005 and 2010. Mrs M was satisfied with this outcome.