Friday, 25 February 2011

Men and Women are different, you know

Insurance pricing relies heavily on statistics. Men pay more for life insurance than women because the statistics show women tend to live longer. Women pay more for Income Protection because the statistics show that women tend to suffer more medium and long-term illnesses than men.

However, last year the Advocate General of the European Court of Justice claimed that it is legally inappropriate to price insurance products according to a person's gender. Next Tuesday, 1st March 2011 the Court is due to rule on this issue.

Depending on the ruling, this could mean that males and females get charged the same for insurance and assurance products going forward. It could even mean that existing policies need to be re-priced to harmonise for gender, although that would be a massive and costly undertaking, with potential challenges from people who have fixed cost contracts.

My guess would be that in the short term, insurance companies are unlikely to bring prices down. What are the bets we see costs of life insurance going up for women and costs of Income Protection going up for men, if rates need to be harmonised for gender?

Saturday, 19 February 2011

Reviewable (me) Whole of Life

There's a particular type of life assurance product that has been on the market since the 1980s known variously as Reviewable Whole of Life Assurance, Unit-Linked Whole of Life Assurance and Make Extra Commission for the Salesman Assurance. Most life assurance companies have sold this type of policy at one time or another; some still do.

The basic idea of this type of policy is usually that you pay a premium, often monthly, and your premium pays for life assurance cover - a lump sum in the event of your death - and also buys units in a fund, providing you with a lump sum that you can cash in after some years. So far so good. The sales pitch usually focuses on the fact that it's whole of life, (meaning that the policy doesn't expire at any fixed date and you can therefore choose to keep your life assurance cover for as long as you need it) and that unlike other types of life insurace policies it acquires a cash value, so you can decide to stop the policy if you do decide you don't need the cover any more and can cash it in. The inference is generally that this is better than paying into a policy that only pays out on death and will expire at the end of the term if you're still alive - "dead money".

Here's a list of reasons why I don't like this type of policy and wouldn't sell one to an enemy, never mind a client.

(1) Review clauses. While the policies can theoretically continue for the rest of your life, there are always premium review clauses - often after 10 years, each subsequent 5 years and when you reach age 70, annually. At these reviews, the life assurance company can put up your premium to maintain the same level of cover or can ask you to reduce your cover if you want to continue paying the same premium. The older you get, the more frequent the reviews become so that eventually you'll be asked to pay so much to maintain your life cover that it just won't make any financial sense. That's not true "whole of life" cover.

(2) Variable cost of life cover. Aside from the periodic reviews, the cost of the life cover is not fixed. Let's say you start a policy paying €100 per month and at the outset €50 of this is paying for your life cover and €50 is buying units in the fund. This 50/50 split is not fixed and as you get older, the split internally will change without you being notified, so that it could be 60 life assurance/40 fund, 70/30 and so on, while you still pay the same €100 per month.

(3) The policy can eat itself. If the internal split between the cost of life cover and the amount diverted into your "savings" fund swings so far in the direction of the life cover that the life cover cost actually exceeds the monthly premium you're paying, the policy can perform a feat that even Hannibal Lecter would have baulked at - it can start eating itself. So going back to the example above, if you're paying a premium of €100 per month and the internal cost of life cover eventually exceeds €100 per month, the policy can start eating into the fund you have accumulated to subsidise the cost of life cover. Over time, the cash value of the policy gets eaten away and can eventually dwindle to nothing.

So my advice is to avoid these reviewable whole of life policies like the plague. There are alternatives. Several companies offer Guaranteed Whole of Life cover - life cover at a guaranteed, fixed cost for the rest of your life. It's expensive, but remember that at some point the policy WILL pay out the life cover and you have complete transparency and certainty around what you're paying, now and into the future, and what you'll eventually get.

Anyway, most of us don't need Whole of Life cover. For many people, the need for life cover diminishes over time - the mortgage and loans get paid off, the dependent children leave the nest and become financially independent, we build up pension funds, savings and investments so that our death is no longer a financial burden on anyone. For anyone in that position, it's far more cost-effective to take out life insurance cover to fulfil a need for a fixed period of time - Term Life Insurance is invariably cheaper than Whole of Life.

If you still can't get past the "dead money" idea - that premiums paid into Term Life Insurance are dead money if you survive to the end of the term, consider two things: - (a) you'd pay extra for a horrible reviewable Whole of Life policy. Do a cheaper Term Life Insurance policy and put the difference into a savings account every month. You'll know exactly what you're paying for life cover and what you're saving and you'll still have a lump sum to draw on when you want. (b) You pay for insurance on your home and car and don't expect to get a return from either if you don't claim. Life insurance is no different.