Whole-of-life insurance: Why complaints are rising fast

Yoga Kissoon was dismayed that her policy's value could be cut, or her premiums increased

An increasing number of people have been complaining about the apparent mis-selling of "whole-of-life" insurance policies.

These are policies which promise to pay out a supposedly fixed sum to the policy holder's inheritors when the customer eventually dies, with the payment coming from the investment proceeds of the person's monthly premiums.

Some people have been aggrieved to find that many years down the line, the bank or insurer that originally sold them their policy has decided that things have changed.

Either the customer must pay more by way of monthly premiums or must accept that the eventual payout will be significantly lower than first thought.

The typical explanation is that investment returns have been much poorer than first anticipated many years ago, when the policies were first sold.

The main reason for the rising number of complaints - to banks, insurers and then the Financial Ombudsman Service (FOS) - is that the possibility of this sort of change was sometimes not made clear in the first place.

Yoga Kissoon, a semi-retired maths teacher from Norwood in South London, has had exactly this experience and has been pursuing a complaint with Barclays bank.

Her husband had taken out a whole-of-life policy in 1984 and she took out another one in 1990.

"We were looking for a policy where the sum assured stayed the same, and the premiums stayed the same, " Yoga explains.

"When we took it out we were on a tight budget. They assured us that the premium would stay the same throughout our life and the sum assured would stay the same.

"The problem is, exactly 20 years later for each of us, Barclays bank wrote to us saying that if we don't increase our premiums they will reduce our sum assured."

Policy value cut

In 2004 Yoga's husband, Mahesh, suffered a cut in the payout value of his life insurance from £30,000 to just under £25,000, and then in 2009 to £20,600, rather than pay more.

Telephone complaints to Barclays about this process got nowhere.

But when Yoga's policy suffered a similar cut in its payout value in 2010, to just under £24,000, she took up her complaint more vigorously with Barclays.

She failed to convince the bank that it had been guilty of some sort of mis-selling.

Barclays pointed out - accurately - that the possibility of a regular review of her policy, with attendant cuts in insurance value or increases in premiums, was referred to in the marketing brochure it supplied.

The brochure said: "In the event that the return is less than expected, existing cover can be maintained by increasing the premium. Alternatively the amount of cover can be reduced."

Crucially, the bank also refused to accept Yoga's claim that separate payment schedules had given the impression of permanently fixed payments.

Nor did it accept her assertion that when a Barclays salesman from the local branch had gone to her house to sell the policy, he had said that the premiums and payouts were guaranteed to stay fixed, as she wanted.

Unfortunately for Yoga, she waited too long before trying to take the matter to the Financial Ombudsman Service (FOS).

She waited more than six months and is now out of time.

However her original problem is not uncommon.

The number of complaints about these policies that went to the FOS rose by 26% in the last financial year, to 1,828.

Fresh surge

The most common complaint was that it had not made clear at the point of sale that the policies could be reviewed at regular intervals, with premiums rising or benefits being cut.

Tony Boorman at the FOS is keeping a keen eye on the rising number of complaints

"The review process has started to bite in lots of the policies that were sold 10, 15 or more years ago," said Tony Boorman, deputy chief executive of the FOS.

"[Our decisions] are usually about what we think really happened all those years ago when the policy was sold.

"Was it really made clear in the documentation to the customers, in the key facts, that this review could take place?" he said.

Now there has been a fresh surge of complaints to the FOS.

There were 1,187 in the first six months of the current financial year, though this was partly due to claims management firms drumming up speculative complaints on behalf of their customers.

In the end, only about a third of the whole-of-life complaints taken to the FOS in 2011-12 were upheld.

That was a much lower uphold rate than for many other types of complaint.

And among the more recent cases the uphold rate has dropped to just 23%.

The total number of whole-of-life insurance complaints is nowhere near as many as those about payment protection insurance (PPI), which have now reached half a million since they first started coming in a few years ago.

But Tony Boorman told the BBC that his organisation was keeping a close on eye on how they develop.

"It is not a red-flag problem but it is on the one-to-watch list," he said.