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ombudsman news

issue 39

August 2004

investment: whole-of-life plans

"Whole-of-life" plans are life assurance policies, designed to provide the policyholder with cover for their entire lifetime. The policies only pay out once the policyholder dies, when the policyholder's dependants will receive a lump sum, usually tax-free. Depending on the individual policy, policyholders may have to continue contributing to the plan right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die. Some plans also offer cover for additional benefits, such as a lump sum that is payable if the policyholder becomes disabled or develops a specified illness.

Providers of "whole-of-life" plans guarantee to pay out when the policyholder dies. However, crucially, they do not generally guarantee the amount they will pay out.

Typically, policyholders' contributions are invested and the life assurance benefits are "purchased" from that investment fund. The fund's performance has a significant effect on the level of future benefits, although the firm will also take into account other factors, such as changing mortality rates and the possibility of reduced investment returns in the future.

The policy will usually have "review" dates, when the firm will compare the value of the plan with the benefits it is to provide. This may result in the firm asking policyholders to increase their contributions. Alternatively, the firm may say that the level of contributions can stay the same, but that it will pay out a reduced benefit when the policyholder dies.

In some of the complaints that are referred to us about whole-of-life plans, the sale of the policy was simply inappropriate in view of the customer's circumstances and requirements. But, increasingly, we are seeing complaints where policyholders say they did not know that the plan would be "reviewed" in future and that the benefit levels could be altered. In looking at such complaints, we will consider whether, at the time of sale, the firm made it clear that the plan was subject to regular reviews and that these might lead to increased contributions or reduced benefits.

Depending on the particular facts of the complaint, it will not always be sufficient for a firm merely to say that it mentioned the potential for review in its product literature. Bearing in mind that the aim of the plan is to provide a given level of life assurance, the result of a review can be highly significant. There could be very important reasons why the policyholder needed life assurance at a certain level, such as to pay for an inheritance tax bill or other debt. So we may uphold complaints where the possible effects of plan reviews are not, in our view, made sufficiently clear or given sufficient prominence.

In some cases, we may also look at the fund into which the policyholder's contributions were placed, to see whether the level of investment risk was suitable for the policyholder.

case studies - investment: whole-of-life plans

issue 39 index of case studies

  • 39/3 - whole-of-life policy - as a result of review, firm tells customer to double his contributions or accept reduced benefits - whether firm gave adequate information about reviews and their possible
  • 39/4 -whole-of-life plan - whether firm "guaranteed" that plan would provide cash sum
  • 39/5 - whole-of-life plan - whether sale of this product was suitable for customers' needs
  • 39/6 - whole-of-life plan - whether firm's product literature gave clear explanation of plan reviews and their possible consequences

39/3
whole-of-life policy - as a result of review, firm tells customer to double his contributions or accept reduced benefits - whether firm gave adequate information about reviews and their possible outcome

Mr B took out a whole-of-life policy from the firm, as he wanted life assurance to help provide for his wife and family after his death.

Ten years after the start of his policy, the firm contacted Mr B to say it had reviewed the plan and that he would have to double his contributions or accept a significant reduction in the amount of life cover that the plan provided.

Mr B was shocked by this and he wrote to the firm to complain. He said that when the firm sold him the policy, it had not given any indication that it might subsequently reduce the amount of cover unless he paid increased contributions. The firm rejected Mr B's complaint, telling him that the possibility that the plan would be reviewed was outlined in the plan's terms and conditions.

complaint upheld
When Mr B brought his complaint to us, we found that he had been given several confusingly similar sets of product literature, only one of which applied to his particular plan. Some of the literature he had been given referred to the fact that premiums would be "level" in the future and suggested that they could not be altered.

The possibility of plan "reviews" was mentioned in one of the booklets that Mr B had been given. However, the information was not given any particular prominence and the significance of the reviews was not explained in any detail, or in what we considered to be a very understandable manner.

At the time of the sale, the firm's representative had written to Mr B, setting out why the whole-of-life plan had been recommended and giving a broad description of how the plan worked and of the benefits it provided. However, the letter did not mention that benefits could be altered in future or that increases in contributions were possible.

We therefore upheld Mr B's complaint. We said the firm should refund the contributions that he had made, and pay him an additional sum (less the cost of the life cover he had received) to compensate him for the loss of investment opportunity. (For more information about payments for loss of investment opportunity, see issues 33 and 37 of ombudsman news.)

39/4
whole-of-life plan - whether firm "guaranteed" that plan would provide cash sum

Acting on the firm's advice, Mr J took out a whole-of-life plan. He later told us it had been his understanding that the plan would provide a "guaranteed" cash sum at a future date, as well as disability benefits and life assurance.

The plan did provide life assurance and disability benefits. However it did not "guarantee" to provide a cash sum in the future; that was only a possibility if the plan's investment performance warranted it.

When Mr J complained to the firm, it confirmed that the sum was not guaranteed. However, it told him the literature it provided at the time of the sale was incorrect, in that it suggested that - at a given growth rate - a far higher sum would be provided than was actually the case. The firm felt that this could have affected Mr J's decision to start the plan, so it offered him a refund of the premiums he had paid, plus interest. The plan would then be cancelled.

Mr J did not wish to accept this offer. He insisted that he had been "guaranteed" a certain sum and that the firm should honour that guarantee. He also said that he did not wish to cancel the policy as he still required the life assurance and disability benefits. This was because he was still using the plan (of his own volition) to protect a mortgage he had subsequently taken out. He therefore complained to us.

complaint settled
We did not uphold Mr J's complaint that he had been "guaranteed" any set sum. The literature made it very clear that any cash sum was dependent on investment performance and it explained that - in certain circumstances - no sum would be payable.

However, we did agree with the firm that the literature had probably misled Mr J and that he might have chosen to go elsewhere for his cover, or to spend his money in a different way, if the firm's literature had been more accurate.

We thought that the firm's offer had been reasonable. However, we suggested that as Mr J wished to keep the plan, the firm should allow him to do this but should also refund the premiums he had paid, plus a sum for loss of opportunity, less the cost of the benefits with which he had been provided to date. The firm agreed to do this.

39/5
whole-of-life plan - whether sale of this product was suitable for customers' needs

Mr and Mrs A, a couple in their 40s with two children, were sold a whole-of-life plan that provided life assurance in case one of them died. The money from the policy would then be used to support the surviving spouse and the children.

Several years later, the couple complained to the firm because they thought they had been sold the wrong product for their needs. The firm rejected their complaint. It said that the policy provided life assurance, which is what they had asked for. It also said that the policy offered "flexibility", should the couple's needs change in the future. Mr and Mrs A were not convinced by this response and, still concerned that they had been sold the "wrong" product - they came to us.

complaint upheld
The documentation completed at the time of the sale, together with what Mr and Mrs A told us, made the couple's over-riding concern very clear. They wanted to ensure that, should one of them die while their children were still young, there would be enough money to support the children until they left university. The couple had not required any form of life assurance after that date and there was no evidence that they required "flexibility". Mr and Mrs A's needs could have been met more appropriately and cheaply if the firm had sold them a simple "term" assurance policy ending at their anticipated retirement dates.

We upheld the complaint and said that the firm should pay the couple a sum to cover the difference between what they would have paid, had they been sold term assurance for the same sum assured as the whole-of-life plan and the amount they had paid, to date, for the whole-of-life policy.

We also said that the firm should provide Mr and Mrs A with term assurance - without requiring evidence of health - at the same premium as if they had been sold term assurance at the outset.

39/6
whole-of-life plan - whether firm's product literature gave clear explanation of plan reviews and their possible consequences

Several years after Dr K took out a whole-of-life plan with the firm, in order to provide life assurance, he was asked to increase his premiums.

He complained to the firm, saying that he had not been told before he bought the policy that it might be "reviewed" and that the premium could increase or the value of the cover decrease.

When the firm rejected his complaint, Dr K came to us.

complaint rejected
We noted that plan "reviews", and their possible consequences, were explained clearly and prominently in the terms and conditions of the policy. The letter that the firm's representative had sent Dr K, outlining why the recommendation had been made, also stressed the possibility of reviews and their significance. We therefore rejected the complaint.

Walter Merricks, chief ombudsman

ombudsman news issue 39 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.