When it comes to insurance and investment products, we have a simple philosophy here at lovemoney.com: Keep them separate.
If you want to profit from an investment, look for the very best investment vehicle you can find. And if you want to protect yourself from a specific threat using an insurance policy, look for the very best cover you can get.
That way, you can rest assured the financial product you get fills the exact purpose you bought it for.
Take any other approach and you risk getting a mishmash of an insurance and an investment product that fulfils neither function very well.
'Whole of life cover' is a typical example of this.
What is whole of life cover?
Most life insurance policies will only pay out if you die within a set period of time: the term of the policy. By contrast, whole of life policies are guaranteed to pay out whenever you die. So as long as you keep paying the premiums, your estate's guaranteed a pay-out at the time of your death.
Sounds too good to be true? Then alarm bells should be ringing.
Why were these policies able to offer much better terms?
The reason these policies could offer much better terms than other life insurance policies was because whole of life policies combined life insurance with a complex investment plan.
The theory was that the investment returns would make it worthwhile for the insurer to pay out a large lump sum to you on your death, even though you may have hardly paid any money in premiums and your death - like taxes - is a certainty.
What's happened recently?
The good news is, whole of life policies are not generally available anymore. But these policies are causing problems for many lovemoney.com readers now, because they were sold 10 years ago with totally unrealistic investment growth assumptions of 9% a year.
Big surprise... a decade later, most investments have failed to meet these expectations. So the insurers are having to rely on some crafty terms in the small print. This stated that the insurer could increase the premiums after 10 years, or decrease the level of cover.
So insurers have started telling customers to either increase their monthly premiums or accept a lower level of cover. And when they complain, the insurer points to the small print and tells them it is their own fault for not reading it properly.
The worst thing is, these policies were targeted at people in their 50s who wanted to ensure their inheritance tax bill would be covered when they died. So they can't just simply accept a lower level of cover because they need that bill to be paid. But as they are now in their 60s and likely on a fixed income, they can't pay more either.
Have you been mis-sold?
If you've taken out one of these policies and you think you were misled about the risks involved, then you should contact the firm that sold you the policy in the first instance. If that doesn't get you anywhere, then you should contact the Financial Ombudsman to try to get compensation.
You may have a case if the fact that the policy premiums were reviewable was not explained properly to you, or it was inappropriate for you to take out a reviewable policy and the adviser knew this.
"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," the Ombudsman announced in its statement on whole of life plans.
"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."
What should you look for in a life insurance policy?
The good news is, life insurance has got a lot cheaper in the last 10 years so you should be able to find a more affordable policy nowadays if you shop around.
The trouble is, there are lots of different types of life insurance policy, and it's important to get the right one for your needs.
To do this, the first thing you need to think about is why you need cover. For example, you might want to cover your mortgage to ensure your family won't get kicked out of your home when you die.
Then think about the term of the policy - many parents, for example, like to ensure their income is protected until their youngest child turns 18 (should the parents die beforehand). That way, their kids won't have to worry about money until they are old enough to support themselves.
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