Whole-of-life policies

Find out more about what we look at:

• Meeting customer's needs: suitability

  Customers sometimes complain that the sale of a policy wasn’t suitable for their circumstances and requirements.

  Just because the whole-of-life policy was the most suitable product from your product range doesn’t mean you were right to provide it. You can explain to a customer that you simply didn’t have a suitable product to offer.

  If we’re satisfied that another type of life assurance (for example, term assurance) would have been more suitable, then we might say you should either:

  • replace the missold policy with the more appropriate one, and refund any excess premiums together with interest and if the whole-of-life plan was cheaper, we’ll usually tell you to reconstruct the plan to the more appropriate one (the customer would then be required to pay the correct premium in future)

  Or:

  • pay the customer compensation that takes account of the average market premium for term assurance at the time the missold policy was taken out (if you didn’t sell a term policy at the time).

  When term assurance would have been more suitable

  Customers sometimes complaint they only needed life assurance for a limited time, but the policy you sold them committed them to paying for life assurance until they die.

  A term assurance policy provides life assurance for a set number of years – the customer chooses this at the start. We’ll look at the facts of each case to decide whether a term assurance policy would have been available and more suitable.

  We’re likely to uphold a complaint if we find that, when you sold the policy, you knew that the customer only needed cover for a certain period, for example, until:

  • the customer's children were of a certain age
  • another source of guaranteed income, for example, a pension, became available to provide for the surviving partner
  • they’d paid off a mortgage or other fixed-term debt

  Investment risk

  Investment funds, such as whole-of-life policies, present a range of risk. Customers sometimes complain that the underlying fund the policy was investing in was too risky. In these cases, we’ll need to look at:

  • the features of the fund the policyholder paid contributions to
  • the customer's circumstances

• Policy reviews

  The policy will usually have review dates, when you’ll compare the value of the plan with the benefits you’ll provide. Although there are some non-reviewable policies, we receive very few complaints about them.

  The customer says they didn’t know the plan would be reviewed

  We’ll consider whether you made it clear at the time of sale that the plan was subject to regular reviews which could lead to increased contributions or reduced benefits.
  
  Depending on the facts, it won’t always be enough for you to say that you mentioned the potential for review in the product literature. The aim of the plan is to provide a given level of life assurance, so the result of a review can be highly significant.
  
  There could be important reasons why the policyholder needed life assurance at a certain level, for example, to pay for an inheritance tax bill. So we may uphold complaints if we think the effects of reviews weren’t made clear. We’ll look at:

  • anything that you or the customer recall from meetings when the policy was sold
  • the product literature
  • any letters sent to the customer explaining the reasons for the business's recommendation

  If we’re satisfied that the review process was explained to the customer clearly, we’re unlikely to uphold the complaint.

  The review wasn’t carried out at the right time

  A plan will usually be reviewed at set times, for example, 10 years after the plan begins, and then every five years after that. The timing will usually be set out in the terms and conditions or key features document.

  A customer may complain if you didn’t carry out a review when you said you would. The customer says they would have surrendered the policy, or taken out additional life assurance, if they’d been made aware of the problems earlier.

  In these cases, we’ll ask you what the results of the review would have been, if it had been carried out at the right time and what you would have advised the customer.

  If we find that the review would have revealed that no action was necessary, or that the policy was performing as expected, we’ll examine the policy’s terms and conditions. If they say the customer won’t be contacted in these circumstances, we’re unlikely to uphold the complaint. But if you said that the customer needed to contribute more or reduce the sum assured, we’ll consider what the customer would have been likely to do.

  If we’re satisfied the customer would have surrendered the policy, we’ll usually tell you to pay compensation on the basis of:

  • the surrender value at the date the review should have taken place
  • plus the total amount of premiums paid from the date that the review should have taken place
  • plus interest on those premiums at 8% simple per annum
  • less the current surrender value

  If the current surrender value is higher than the historic surrender value (plus premiums and interest), we wouldn’t tell you to pay compensation. This is because the customer would be no worse off by surrendering the policy.

  If the customer continued with the whole-of-life policy because they still needed the life cover it provided, but continuing on a different basis, and we’re satisfied that the customer would have taken out alternative cover, we may make a deduction for the cost of the life assurance the policy provides. This would usually be from the date that the review should have taken place.

  If we conclude that the customer wouldn’t have continued with the whole-of-life policy and instead would have taken out another replacement policy elsewhere, which is now more expensive than when the review should have been carried out, we may tell you to pay additional compensation to recognise that extra cost.

  Alternatively, we may decide that the customer would have continued to pay into the plan. In this case, we’ll usually tell you to ‘reconstruct’ the plan as it would have been if the review had been done correctly and the customer had been asked to pay extra premiums to keep the policy ‘on track’. We wouldn’t usually expect the customer to repay premiums, but we may consider it fair for them to meet increased costs in future.

  The review was unfavourable

  We often see complaints where the business carried out a review and asked for significantly more money to maintain the sum assured. Or it said that if the customer wanted to pay the same premium, the sum assured would have to be reduced.

  We’ll consider each case that comes to us to determine whether the information given during the policy about reviews was clear, fair and not misleading in line with regulatory obligations.

  The customer would have taken out a different policy instead

  If you had a non-reviewable policy in your product range, we might conclude that if the customer had been aware of the implications of policy reviews, it’s likely they would have taken this other policy out instead.
  
  In these circumstances, we might say that you should reconstruct a non-reviewable policy using whatever assumptions and costs applied at the time of the sale. Where you don’t provide a non-reviewable policy, and the customer can’t get life cover elsewhere, it may be possible to construct one with the business paying any extra cost. 

  Another option would be to tell you to rewrite the policy on a ‘minimum’ or ‘standard’ sum assured basis (if you provided this choice). This would increase the likelihood of the sum assured being maintained in the long term, because a larger part of the premium would be directed towards the investment element of the policy.

  If we take this approach, we’re unlikely to say that the customer should now be asked to pay the extra costs that would have accrued if the new premium had been in place from the start. But they would have to pay the correct premium in future.

  We’d need to be satisfied that the customer had a continuing need for life assurance before telling you to reconstruct a policy, because reconstruction might generate a higher surrender value.

  These policies tend to be more expensive, so we wouldn’t take this approach if the customer:

  • didn’t want to pay higher premiums now
  • couldn’t afford the higher premiums now
  • couldn’t have afforded the premiums when the policy was originally sold

  Alternatively, we may ask you what sum assured could have been provided on a non-reviewable, ‘minimum’ or ‘standard’ basis for the premium the customer is now paying. We’d then say that the sum assured should be fixed at that level and the customer would continue to pay the same premium.

• Life assurance wasn't necessary

  In some complaints we receive, we see that the customer didn’t actually need the policy. In these cases, we’ll consider their personal and financial circumstances at the time they took the policy out.
  
  We’d be likely to uphold a complaint where the customer was young, single and living at home with no dependants. This is because the main reason for having whole-of-life cover is to protect someone other than the customer from being financially disadvantaged by their death. If no-one is going to be financially disadvantaged, we’ll look at whether there was another reason for having life assurance.

  If the customer had dependants, or debts that they wanted to protect, we’d take into account how much cover they had before taking out the policy, for example, cover provided by an occupational pension. 

  If we decide that the customer didn’t need life assurance at all, we’re likely to say that the business should refund all payments made to the policy. We’ll also usually tell you to pay an appropriate rate of interest, because the customer didn’t have the money, or was deprived of an investment opportunity, by paying the premiums or lump sum. 

• The policy as a way to save

  We also see cases where customers say they took out a whole-of-life policy as a way of saving money, for example, to buy a house in the future.
  
  If we’re satisfied that this was the customer's priority, we’ll look at how much the life assurance element of the plan cost. If these costs were significant, and might affect how well the plan could provide the savings, we’re likely to uphold the complaint.

• Potential inheritance tax liability

  Sometimes, a customer takes out a whole-of-life policy to cover a potential inheritance tax liability when they die. But in cases involving reviewable policies, and maximum policies, we’d expect you to have made sure:

  • it was suited to the customer’s circumstances
  • it was clear to the customer that they may have to pay more in the future to maintain cover for that fixed liability

  We’ll look at whether the policy could continue to provide the cover in the long term. And if that was unlikely, we’d usually uphold the complaint. We’d usually expect whole-of-life policies sold for inheritance tax mitigation to be set up on a ‘standard’ basis and written in trust.

• Issues you may raise if a customer makes a complaint

  There are some common issues we hear from businesses responding to complaints about life assurance policies. These include:

  Guaranteed insurability was a specific requirement of the policyholder

  We’ll need to see evidence that this was what the policyholder wanted, if the advice seemed unsuitable because there was only a limited need or no need for it.

  The customer wanted to vary the life assurance as needed with guaranteed insurability in future

  Where there’s a limited need for a limited period, we’ll have to see evidence that the policyholder thought that was a key benefit.

  A whole-of-life policy is the ‘first rung on the protection ladder’ and therefore suitable for a customer’s life ahead
  

  This argument is usually made when a whole-of-life policy has been sold to a young person with no dependants or assets to protect and no need for life assurance at the time the plan was sold to them. We’d normally uphold these cases, although they are rare, and offer a refund of premiums, less any surrender value.
  

  The way the plan operated was explained in the literature

  This doesn’t necessarily mean the plan was suitable or the adviser has acted correctly. We’ll have to decide whether it was a suitable recommendation and whether the literature clearly explained what could happen based on the available evidence.