If you have life insurance that is “whole of life” you really should read this.
Back in the 80’s, 90’s, 00’s and even up today in limited circumstances people are sold life cover polices that are what is called whole of life policies.
This means that they will pay out in the event of your death, whenever that is. That is of course provided you keep paying the premiums up until the time you die.
The problem is however that these policies are what is called “reviewable”. This means that after the first 10 years is up, then every 5 years and then every 1 year, the insurance provider can review your policy and ask you to pay more money to keep the same level of cover.
I have often seen premiums go from €100 per month to over €400 per month, I heard recently about a situation where somebody had a larger policy and they were paying €7,000 per annum and are now being asked to pay €54,000, just to keep their existing cover the same.
It feels really unfair when this happens, you take out a policy in the 80’s you pay into it for 30-35 years and now as you get older and your income is dropping, and lets face it you are getting closer to death, the life insurance company comes along and tells you if you want to keep the cover the same you gotta pay more money every month.
The other option they give you is to keep paying the same amount of money each month but instead reduce your cover, often by 40/50 or even 60%+.
Contrary to what it might feel like the life company doesn’t pluck the new premiums out of the sky. There is a science behind how they calculate the premiums.
The first thing they are looking at is the statistical probability that you are going to die, the older you are the closer you are to death, so you are kind of snookered on that front.
When you took the plan out originally the cost of the cover was much lower, that meant that some of what you paid into the policy each month was divided, often 50/50. With 50% covering the cost of the cover and the other 50% going into an underlying fund.
The big mistake people who took these policies out made, but also the mistake made by the people selling them was that they referred to this underlying fund as a “savings fund.”
The underlying fund was never supposed to pay for your trip to Costa Brava, put the kids through college or pay for Christmas every year. I have seen people use the fund for things like this but also for some other mad things over the years.
The purpose of the fund was that in the early years you build up the fund so in the latter years as the cost of cover increased, the life company could dip into the fund and maintain the cover without increasing your premium.
All sounds great except the funds often didn’t perform as expected and sometimes the life companies didn’t review them as regularly as they were supposed to. The problem was huge before you knew it with underlying fund bombing out without you realising it.
One minute you were paying away for the life cover you were delighted you kept going over the years, through good times and bad, and the next minute you get a letter saying you need to increase your payment by 600%.
When this happens to you the natural reaction is to complain. The reality is these plans were set up so long ago that it is very difficult to bring a decent case against the life company involved. The types of things that you need to consider when complaining are whether the life company reviewed them routinely like they were supposed to? When they did were their findings communicated to you in an understandable manner?
Once you have exhausted your options on the complaints side of things there is always the ombudsman and potentially court.
But that still doesn’t solve the problem of what you do for life cover, you can’t go from paying €100 per month to now paying €600 per month when you are in your 70’s.
The reality is that as you get older the need for life cover reduces. Your human capital is current value of all your future income.
If you are 40 years of age with a plan to work for another 20 years earning €100,000 per annum, in simple terms your human capital is €2,000,000 (20* €100,00 = €2,000,000)
Life cover is there to protect your human capital, because if at 40 years of age you die your family is going to be €2,000,000 down in terms of the income they would have got.
The closer you get to retirement the lower your human capital is, when you have stopped work you don’t have human capital anymore. Life cover is supposed to be used to protect your human capital.
So, unless you are using the life cover to pay for an inheritance tax bill ask yourself the questions do you really need this cover?
If you do, then consider a term insurance policy. (not suitable for inheritance tax)
Term policies are about 5 times cheaper than whole of life plans and may get you out of a whole.
Before you do anything get advice. Everyone is different and therefore what suits somebody else may not suit you.