Over-50s life insurance was never a great idea. Now it’s a disaster
Over-50s life insurance has never been one of my favourite financial services.
In fact, a decade or so ago I used to think it was so bad that it shouldn’t exist at all. If you’re not familiar with it, this is insurance that allows you to pay in a small amount each month in return for a guaranteed payout when you die.
If you die within a few years of taking it out, it will end up paying out a reasonable amount more than you paid in. But if you live a long life, you’ll end up paying in much more than you’ll ever receive – and in most cases you will lose every penny of that payout if you stop your payments at any time.
Worse still, most over-50s policies offer fixed payouts, which means their value is eroded by inflation over time. Most people take these products out to provide a contribution to funeral costs when they die. But given funeral inflation has been even greater than the consumer prices index over the past 10 years, many payouts do not come close to achieving that goal.
I’ve also never been keen on the fact that over-50s plans have tended to be sold via heavy television advertising, usually backed by the face of a trusted celebrity and boosted by the offer of free gifts for every purchase.
This never felt like the right starting point for a considered financial decision.
However, my view softened a little some years back when I watched a set of focus groups full of customers who bought these plans.
In many cases they were individuals who had recently seen a family member or friend die young – without any assets to pay for their funeral or pass on to their family.
They were often pessimistic about their own mortality and believed it was unlikely they would live long enough for their over-50s plan to represent bad value. Essentially, they were happy to take a bet on when they would die – and felt that if they lived long enough to end up getting poor value on their life insurance, that was a price worth paying.
Importantly, the starting point for monthly contributions on over-50s plans is low – about £4. And while the focus group participants often accepted that they would do better putting their £4 a month into a savings account, they knew that if they did that, the money would be spent, rather than kept safe for their family when they passed away.
So while my advice would be to consider a funeral plan, traditional whole of life insurance or a savings account before opting for an over-50s plan, I accepted that they could offer perceived value for a certain set of customers, particularly those with low incomes.
But that was before 10pc inflation came along. If the value of over-50s plans with fixed payouts looked questionable in a 2pc inflation environment, it looks very shaky indeed in today’s world.
With inflation at 10pc, the £2,000 payout that your over-50s plan promised would only be worth £1,818 a year later. And just £1,652 a year after that if inflation stayed at that high rate.
Even if inflation started to fall back to normal levels, the real value of payouts for those who die in 10 or 20 years would be a fraction of what it was when they bought the plan.
Over the past few weeks, Royal London, one of the two biggest players in the market, has quietly pulled out altogether. Royal London is a mutual insurer – owned by its customers – and its entry into this cut-throat market back in 2014 was a surprise.
Former boss Phil Loney saw that a lot of people were getting poor value from over-50s plans and decided he would try to improve the market through innovation.
Royal London went on to become the first to offer a “protected payout” – which meant you could get something back once you had paid in for a certain number of years, rather than facing the prospect of losing everything if you stopped paying at any time.
It also introduced more flexibility into the model, providing payment holidays and the ability to reduce payments, reducing the chances of customers having to cancel and lose everything.
These were features that other providers replicated. And so in many ways Royal London did achieve its aim of improving standards.
Its withdrawal is a blow for competition in the market and ultimately for consumers. It’s also rather uncomfortable for the big firms that remain. All insurers are now obliged to prove they are offering “fair value” to their customers, and a high inflation environment is making that task ever more challenging for over-50s providers.
As a minimum, they will need to be very clear with their customers what the impact of inflation will be on their payouts. And ideally they would offer an inflation-protected option.
For now, if you are thinking about taking out a plan, at the very least pick one that offers a cap on the age at which you have to pay in – and be sure to shop around and get the very best possible payout for your premium. If you can afford it, a funeral plan will offer much better value – or consider putting your monthly contribution into an Isa.
James Daley is managing director of the consumer group Fairer Finance
