In April 2018, I wrote about the need for life cover. In that article, I warned against the dangers of reviewable life cover contracts. Let me remind you of how these plans work.
They are open ended life cover plans; in other words they will continue until you either die or cannot afford to pay the premium anymore, usually the latter. When you start off paying into them however, they are really cheap because you are usually young when you take out the policy and the chances of you dying are actually quite low. The reviewable bit though is that an actuary will review the cost of this cover every few years and assess the likelihood of someone of your age dying is. And as you get older, this risk increases and so does the cost.
Under the reviewable life cover contract, there’s also a savings plan that is supposed to increase in value to cover these increased costs. Except as you age, the costs of the cover increases quicker, so this fund is quickly worth nothing.
You then get a letter from the insurer to tell you that you keep the same level of cover, you have to pay vastly more than you are paying now. Or if you can’t afford the increase, you have to vastly reduce the cover. This will happen every time the policy is reviewed.
I had a meeting recently with a couple who are in their mid 40’s who told me they were paying €289 for their life cover. I asked if they had their premium increased due to medical history but they said no. So I decided I’d have a look but I suspected it was a reviewable life cover plan. It was indeed.
The plan was taken out 16 years ago and was index linked, so the benefits and premium was increased every year, so the level of cover was increasing every year automatically (the review is another thing). The cost of the benefits that they have is €178 a month. But they are paying €289, so where is the €111 going? I gave the insurer a call to find out. The conversation went like this:
“Is there a value to this policy? ”
” As of today, the policy has no value ”
” Well, where is the €111 going? ”
” It is to pay for future increases ”
” But where is it then? It has to be somewhere. ”
” It is in a unit linked fund ”
” Which doesn’t have a value. So, is it is deficit then? ”
” Yes, in deficit by 817 ”
” It’s in deficit by €817? ”
” No, 817 units ”
” How much is a unit worth then? ”
” It’s one to one ”
” In other words, €817 ”
As you can see, the insurer was not too willing to give out this information. And a customer who did not understand the complex world of financial products would have been easily fobbed off with “it is to pay for future increases”.
So over the next 8 months, this client will be paying €111 extra to fund this deficit that was created in their fund and not a penny will pay for future increases. So when they get the next review letter, the increase will be even higher.
The effect of this on clients is that because they have put so much money into these policies, they continue paying the premiums because they want to get something from it. The problem is it’s life cover, so that something is a pay out when they die! It’s much better to just take out reasonably priced term cover, so if at the end of the term, you are still alive, then fine, the cover served its purpose.
If you have any questions, drop me an email at steven@bluewaterfp.ie