Can my life insurer put up my premiums?
"10 years ago we took out a whole of life and critical illness policy with Legal & General. The policy documents stated that it would be reviewed after 10 years and premiums might increase substantially.
"We have now received our policy review. To maintain our current level of cover, Legal & General wants to increase our premium from £99.75 a month to £168.42 a month. We had anticipated an increase of between 25% and 35% – not nearly 69%. This looks like highway robbery."
Ask the Professionals: Francis Klonowski, principal of Klonowski & Co in Leeds, says:
With a whole life plan, you can choose the basis on which the premium should be determined for the level of cover you require. The two main choices are ‘standard’ and ‘maximum’.
Both guarantee cover for 10 years – at which point the life company reviews the plan to see whether it can continue to offer the same level of cover for the premium you’re paying. The standard basis should be sustainable throughout life without any premium increase, but on the maximum basis, it would almost certainly have to be increased.
Standard cover requires a much higher premium at the outset. In many cases, cost is an issue, as the cover is usually needed for a family situation and budgets are often limited.
People naturally want the highest amount of cover for the lowest possible cost, and so choose the maximum basis. It may not seem a bad deal – because by the time of the first review, you are likely to be earning more, so any premium increase would be affordable – in theory, at least.
But the problem is that the plan is built on investment. Each premium is invested in a chosen fund; every month a certain amount is taken from the fund to pay for the life cover. As you get older, more has to be withdrawn to sustain the cover – which means an increase in premiums at the first 10-year review.
If investment returns are also unfavourable, as they have been recently, the increase is even higher.
The other side of the equation, however, is that your life cover needs may well be different to when you first took the policy out. L&G would have offered you the alternative of keeping the original premium, with greatly reduced life cover, and this could be enough for your needs.
There is another possibility: if you would be happy with a 25%-35% increase, you could ask L&G how much cover it would offer (in the same plan) if you increased your current premiums to this level.
Either way, you should use the opportunity to review how much cover you need to ensure the survivor will be financially secure if one of you died or had a serious illness.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).