THE on going problem about low cost whole of life policies has been raised once again by Mr C from Co Meath who read our recent article on term insurance rates.
"I will be 65 years next year and my life cover will mature at the end of that year. Your table is at total variance with what I am being offered at the end of 21 years. My monthly payment is £9.52 a month or £114 a year and I started paying at age 44. My payments are roughly a quarter of those shown on your table for £100,000 and so I believe I should he entitled to £25,000. But the insurance company has told me that the projected value of my policy is £6,000. Surely this is unfair."
Ordinary level term insurance has no investment value, it simply insures your life for the agreed period of years with benefits paid out only upon death. Mr C has purchased a whole of life policy or possibly a convertible term policy which converted to a whole of life contract. The rates and benefits we published carry death benefits only and no investment value whatsoever.
Unlike term insurance, whole-of-life policies are supported by the purchase of investment units (hence unit linked) and are too often underpriced. Mr C's monthly steady contributions of £9.52 would not have been high enough to meet both a death benefit and anything like a £25,000 maturity value at age 65. Additionally, because his premiums were not going up automatically in tandem with his increasing age and health risk, investment units had to be sacrificed, thus diminishing the value of the underlying investment fund. In many cases, though not necessarily Mr C's, low cost whole-of-life policies bomb out all the investment units are sold off to shore up the life cover and the policy eventually becomes worthless.
The best whole-of-life policies pitch the premiums very high in the early years and guarantee to maintain the life cover for as long as you live. That they also carry an underlying value is attractive to people who understand she associated investment risk and reward. They are also widely sold as a sophisticated, and perfectly legal planning aid for avoiding payment of high levels of inheritance tax. But whole-of-life policies, which also happen to carry relatively high costs and charges, are unsuitable for people with modest amounts who need life insurance and who also want to build up a nest egg.
In hindsight Mr C may be disappointed that he ended up with the `wrong' product, but his choice of this contract was not a complete disaster for a total contribution of £2,394 he has been quoted a projected Value of £6,000. This represents an accumulated return of 250 per cent or 11.9 per cent per annum.
