More than half a million people are trapped with life insurance that could force them to choose between unaffordable premium hikes or a devastating drop in payout money.
The controversial investment-linked insurance policies were popular decades ago, but have since been all but abandoned by customers and firms after an explosion in complaints.
As the policies are tied to investments, the insurer can demand higher premiums from customers if the funds do not perform.
Controversial investment-linked life insurance policies were popular decades ago, but have since been all but abandoned by customers and firms after an explosion in complaints
And if they refuse to pay up, their claim value can be slashed by tens, or even hundreds of thousands of pounds.
Yet, around 541,000 policyholders were still paying millions of pounds into ‘unit-linked’ life insurance in 2018, according to the latest figures from the Association of British Insurers (ABI).
If policyholders keep up with premium payments, the plans guarantee a payout when a customer dies.
But if a customer wants to stop making payments altogether, they are offered a ‘surrender value’, which can be less than 1 per cent of the money they have already paid in.
Widower Malcolm Brown, 83, took out a policy with his late wife, Cora, in 2003 and began by paying £50 a month for their family to receive a £217,495 payout when they both died.
Canada Life wrote to the couple in 2013 to say it would be hiking their monthly premiums to £278, and that if they did not agree to this within 30 days, it would cut their payout to just £52,071.
But when the letter was sent to their home in Ascot, retired support worker Cora was terminally ill with breast cancer, and former salesman Malcolm believes she opened the letter and forgot to tell him about it.
H e only found the letter in September the following year, a month after Cora died aged 74.
When Malcolm called Canada Life to say he had missed the letter, the insurance giant insisted it was too late to reinstate his original payout — even though he was willing to pay the higher premiums.
He cancelled the policy in December and reluctantly accepted a surrender payment of just £670.
‘Canada Life has shown me no sympathy and has caused me so much distress and anger,’ says Malcolm.
‘This firm should have made every effort to contact us when it was going to reduce the payout so much, I can’t understand how one letter was enough.’
Such plans work by investing some of the customer’s premiums into funds. This has led to the policies being touted as investment opportunities.
In the past, policyholders were often allowed to withdraw a limited amount of cash from their policies before they died — but this was dependent on the cash value of the policy and how long it had been set up for.
In the early 2000s, the Financial Ombudsman received a surge of complaints from policyholders who claimed they had been mis-sold their plans.
One Money Mail reader who has paid more than £18,000 in premiums for a plan, has been offered a surrender payment of just 60p (file picture)
And, in 2013, more providers abandoned these policies after the regulator clamped down on commission earned for selling investment products.
Today, there is only one unit-linked life insurance policy left on the market, and it does not allow policyholders to withdraw any cash.
One Money Mail reader who has paid more than £18,000 in premiums for a plan with Sun Life Financial of Canada, has been offered a surrender payment of just 60p — 0.003 per cent of the money he has paid in.
The 72-year-old, from Essex, has been paying £61 a month in premiums for more than 25 years.
But the father of two, who does not wish to be named, has seen his payout value plummet to just £18,320 from an original £100,000.
He was first asked to increase his premiums in 2008, from £61 to £115.50, or else face seeing his payout cut to £45,540.
Since then, he has rejected six more reviews, but refuses to accept the surrender payment offered by the company.
‘The surrender value it has offered is derisory, it’s an insult,’ says the former construction worker. ‘It feels completely immoral.’
Other policyholders have been left facing hefty premium hikes in their late 80s and 90s.
May Stockhill, 89, a retired restaurant owner, took out a policy with Sun Life Financial of Canada in 1988 for £15 a month.
The mother of three, who lives near Doncaster, wanted the £6,926 lump sum to pay for her funeral.
But she has now been told she will have to raise her premiums to £115 a month, or her payout will be cut to just £1,038.
And, while May has paid in £5,655 over nearly 32 years, the insurer has offered to give her only £874 if she were to cancel the policy.
Her daughter, Gill Carlile, says: ‘My mother bought this policy in good faith and all [the insurer] is doing is taking advantage of a vulnerable lady.’
Last year, the Financial Ombudsman saw a 24 per cent rise in complaints about whole-of-life policies compared with the previous financial year, with the majority of the 1,620 cases relating to plans that could be reviewed, such as unit-linked plans.
Martyn James, of complaints site Resolver, says: ‘It’s shocking that hundreds of thousands of people are trapped in unit-linked policies, faced with the daunting choice of moving their cash and losing out in fees, or risking staying put and watching the money drift away.’
Canada Life declined to comment on Malcolm Brown’s case.
A Sun Life Financial of Canada spokesman says he believes the unnamed reader had been informed about how the plan worked. He declined to comment on May Stockhill because her case is being investigated by the firm.
An ABI spokesman says: ‘The terms and conditions of policies should be clearly set out.
‘When assessing options, getting independent financial advice can be important in making the right decision for your circumstances.’