A friend took out a joint policy in 1988 with his wife on last death basis. I have the original forms. Premium was circa £4500 p.a. They were 76 and 74 at the time. The policy was placed in Trust and is therefore therefore outside the estate, which is what the plan was all about, and the amount insured was £100,000. So on the death of the last of the couple £100,000 would be paid out free of IHT. One of the couple has died, and the remaining lady is now 98 but in good health in a home.

By 2012 they have paid out £110,352 (e&oe). Some years ago (I cant yet find when) the payout reduced to £87,000 and today we have received a letter saying that the payout will be further reduced to some £45,000, along with various reasons, which are pretty much nonsense as far I can see.

What should we do ? The couple had no idea of this diminution of the payout when they took out the policy. Obviously, I will get from the company a premium based on keeping the payout value, but that might be unaffordable.

Has anyone any ideas ? Do we take this sitting down ? Ideas please - (and please not with the comment they shouldn't have done it - they did, that's history, I wouldn't have done it and would have run a mile from such a thing especially as Hill Samuel were involved).

I'm not an expert, but these sorts of policies to my eyes are like insurance policies, but with the option that they are not required by law, unlike car insurance.

What about the Equitable life scandal, the private pensions mis-selling. You have to look at what is written down as an absolute promise that they would pay.

Are there any get-out clauses for the insurance company? did they read the small print?

Are there age related clauses?

Any insurance policy is only as good as the company that offers it. If they don't stick to their promises, and many try to wriggle out of as much as possible, you can only take them to court. But that will not mean that you will definitely get the money that you thought that you were going to get.

Basically it depends if the corporate ethos is to sting their customers for what they can and pay out as little as possible, which helps their salaries or dividends for their shareholders. It depends for whose benefit they are working and if they have actually got a return on the money. If they have made a loss, like if they invested in the major banks, that insurance company might have great difficulty in paying out what is actually owed, and would go bust if it did.

Of course such a company would have to try to get its policy holders to take less than they thought they were going to get to stay afloat.

There has always been some good advice for things like this

"Don't let the tax tail wag the investment dog"

I discussed things like this with my mother in great detail before she died. It is always better to give the money away to children as early as possible so that they can invest it for themselves. Then you don't have the IHT. If they had paid the premiums to their children, that would have offset the IHT anyway.

Some insurance policies you might give you a benefit, and many do, but by the nature of these things, there will always be a significant number that get a bad "return". This is spreading the risk across their policy holders, linking it to investment returns. Sometimes the numbers won't add up and the insurance company will defend itself.

Try The Times money section, or the BBC (moneybox) or another independent financial help programme/publication. When they get bad press, companies try to sort these things out pretty quickly.

Agreed with above - my friend thought that an young chap who turned up in a suit with a shiny briefcase must be telling the truth. There were many better solutions, but my the time I and the family knew it was too late. Same goes for an AIM wrapper advised by a well known firm. All the ISA's sold and placed in the AIM wrapper which promptly fell and still hasn't recovered. It will take years to make up the £250,000 sold from the ISA's, which although they have IHT at 40% wont (usually) drop by over 40% in value which is what the aim shares did ! Anyway we are stuck with what we have - the ISAs are being built up for incpme free of tax, the AIM p/f is outside the estate, even if its worth very little, and now we have the insuranec poliy problem.

Does anyone out there know whether, if we increase the premium and pay it out of income, will be deemed 'payment of regular nature out of excess income' and therefore we can keep the £87,000 pay-out ? Could we swap some non-income producing shares to income producing and not be challenged ?

I was told, as were her children, that the policy was to pay out when they had died. Thats why it was placed in Trust. I was certainly NOT bought so they could gift their money away - they knew that would be needed for care. She has her E.P.A in force now, and care home fees so far total over £94,000. Assuming car home fees dont rocket too much, she will have some IHT to pay as they didnt put all insurance bonds they were persuaded to buy by the men with shiny suitcases into Trust.

I will add that the only reason they have so much money now is that the kept a pool of shares in their own names, and did their own investing. These shares have done well - they have not been changed since 2009 and as they are held in a normal (vantage) account have few fees deducted. Its only where they used advisors that its gone wrong !

It shows the worth of buying investments magazines, reading, understanding, picking good stocks and investment trusts, with the odd scattering of unit trusts when the marketing was misleading and a good dose of luck !

Once again we have examples of the less than honest practices within the financial industry. What drives this type of activity? Simple, commissions, 'mega' salaries & bonuses & profits- and look at the palatial premises of major companies in the field: these don't come cheap. Add to this the colossal fees charged by major accountancy firms for the annual audit- and consultants employed on endless projects and feasibility studies. It is little wonder that the average 'joe public' gets ripped off time and again whilst attempting to make provision for themselves and their families.

bb,

Sounds very similar to my mother's case (she was also in her 70's when she took out the policy). She, too, was guaranteed a sum for 10 years, (subject to a five-yearly review which passed without adjustment), and when it reached the 10th year review, the fund was exhausted and she was asked to pay the full new premium for an 80-something year old. We declined.

Your friend asked the right question ("How long after 10 years would the policy be self-funding"?). More important; what was the answer?! These policies are only "self-funding" to the extent that there is anything left in the accumulated investment fund, but (probably unknown to you) they've been drawing part of their premium out of this for probably the last 5 years.

These policies only work at all if you have the good grace to die by the time you are around 85. Back in the 1960's/70's/80's that was probably a fair actuarial bet, but longevity has increased dramatically and it is not uncommon to live many years beyond that.

The type of policy cover has been explained so well by Mike.

It depends how the company is set up to handle.
a) the life insurance aspect
b) the investment aspect

If they have subcontracted out the life insurance to an underwriter, Lloyds or whoever, and do not assume that risk themselves, then the insurance underwriter has no option but to balance its books year on year by seeing how old people are and how likely they are to die.

It depends how they do the statistics.

With the investment aspect, by separating it out as a separate thing, then of course, as the insurance premium rises with age, the investment part has to reduce.

This is because the risk has been split into two components, both of which are time related.

So instead of a company making sure that they get the best returns, they have laid-off (betting palance) the risk aspect of it.

So, instead of the customer thinking that they were putting their money with a company that is going to invest all of it, and then past a certain date, the investment returns will increase so fast that they are covered, without further payment, instead the spreading of the risk across many customers of all ages, laying off the risk component means that the customer will definitely get a poor return.

Be careful with structured products. Sometimes the structure doesn't work in the customers best interest.

Any decent life insurance company should be able to do the sums and do the projections, based on the changing life expectancy.

By separating out something that could be done on the basis like a pension scheme, of greater sophistication, what has happened is that in separating out the insurance against "risk of dying at a certain age", gives a financial product that is very much less than the sum of its parts.

It is so awful that it is so obvious!!

Be very careful with structured products. Separating out risks and investments into different components will cost more and more, with lower and lower return.

Unless you die early!

As you get older and cannot afford the premiums, what happens is that the fit an healthy give a huge income to the insurance company / underwriter, that they have the risk completely covered at no potential loss.

An insurance company could cover all risks and review what level of payout it would do for all customers every year, and act like a sophisticated pension fund, with life insurance cover, but unfortunately this one hasn't.

This isn't a whole life plan, it's a company that has structured a product that is no good for its customer, and I would be embarassed to work in such a company.

This is one of those products that should be made illegal, bacause of the fact that for some people they have to give up payments and get no benefit whatsoever.

I am not an IFA, I do not work in the industry, but the calculations and questions to ask should be written on a prospectus, to demonstrate how the "life insurance premium" is going to damage the return (benefit, if you want to call it that).

And this is only my opinion, and does not constitute financial advice.

Whilst the last two posters are absolutely technically correct, I think they miss the main point of busy bee's original complaint. Most people going into these schemes simply don't understand the nature of these 'reviewable' schemes. I regard myself as relatively financially sophisticated, but it didn't occur to me until my mother's predicament made me look into my own policy in more detail. What I thought I had bought, and what I wanted, was to achieve a specific sum on death to meet an IHT obligation, and it was a given that the policy would run until death whether that was at 35, 65, 85, or 105. There used to be such schemes where the sum assured and the premium were fixed. I was relatively young when I took out the policy and the 'review' element was waved aside by the adviser at that time as an irrelevance.

As I said before, the most useful tool in understanding the problem is to request an "Illustration of Cash Values" (a projection of what the policy will be worth at various dates in the future given assumed growth rates of 4%, 6% and 8%). They WILL all end up at 'Nil'. In my own case, the projection provided showed that, if the fund achieved a 4% growth rate, my fund would be reduced to nil by the time I was 76 and by the time I was 86, it would be nil whether 6% or 8% growth rates had been achieved.

The financial authorities should force all insurance companies to send these Illustrations now to their clients who have such schemes, with a covering letter pointing out that if they didn't condescend to die before the ages shown, they would either be left with nothing or would have to pay completely unrealistic premiums.

A lot of commentson this, some well informed, some less so.

I worked at Hill Samuel from dropping out of FE college at age 16, starting there in January 1980. By 19 I was running all the admin' in the Northern region before being headhunted by an investment brokerage in 1985.

This sounds like a Flexible Protection Plan (FPP). This was a unit linked whole of life policy where the cost of life cover was calculated each year according to the client's age at the time. This is NOT the same as a 'Reviewable premium' plan though indeed the premiums are indeed reviewed annually after the tenth anniversary, in terms of what is needed to keep the cover in force. (Reviewable premiums alter according to mortality experience and apply accross the range of policies of any given type.) General mortality does impact FPPs but the review is an individual exercise for plans of this type, taking into account specifically how much cover is required in excess of the accumulated fund. Obviously as this client is 98 the cost of providing any cover is very high.

A traditional non-unit linked guaranteed-premium whole of life policy works on a premium costed at outset that never changes. These are few and far between. I always regard life cover for IHT as a last resort though. It's the kind of policy that's sold by those who have not planned properly for their clients in advance. Sadly it's also the kind of policy sold by those who want to earn a large commission payment and who assume they'll be long gone by the time problems occur. Typically the FPP paid year 1 commission equal to 99% on the first year's premium on indemnity terms or 120% on non-indemnity.

The theory behind the FPP was that it would build up a lump sum. Part of the premium went to pay for life cover, the rest was invested. Had the investment done well then the fund value might have grown to exceed the cover amount in which case, on death, the higher fund value would have paid out. Mortality deductions would have rediuced to zero as the sum assured would have been covered by the fund value.

The cause of the problem is two-fold: 1) The client has lived beyond normal mortality. 2) Stockmarkets have been generally poor for the last ten years. I say two-fold, there might be a third cause. If the adviser sold it on a 'Maximum cover' basis, or any any basis where the cover was higher than 'Standard', not enough would be invested and premium increases would be more likely. On maximum cover assuming 7.5% growth the cover was usually projected to run out after ten years. As it has sustained rather longer however it does appear that more realistic premiums were paid.

As I worked at HSLA in my youth in a Technical/Admin role I didn't sell these plans myself. It was however obvious to me that problems like this might occur, hence I've never sold one in my advising career since, the reason being that I intend working in this profession for the rest of my life and if I make a mistake I'll be the one that has to clear it up! I have seen others sell them and come to grief. My last former employer sold one before I joined him - the Skandia equivalent - for a £1m sum assured, again for IHT mitigation, and again the client lived longer than expected. In the space of 3 years the premium went up from around £7k to £35k. He squirmed every time a renewal notice arrived, knowing it would make for a very uncomfortable conversation!

There is no painless answer to your problem but if you would like my advice I can be found via the FSA register or via google. I am based in Castleford, West Yorkshire, but I have clients from Devon to the Shetlands.

Thank you all - just got a paid up price £23,000 (over the phone - not in writing) ! ...and we have 30 calendar days to respond to their letter from the date it was written, but they will take between 10 & 15 working days to get revised quotes out - this is abominable - on whose side are they ? They have agreed that the premiums paid to date total £110,000. So - we are complaining, and will see where it gets us.